The fragility of the global economic recovery evidenced in Europe's debt crisis in many ways served as a reality check for Saudi business executives, Banque Saudi Fransi's latest report on “Business Index Saudi Arabia” said on Tuesday. Dr. John Sfakianakis, the bank's chief economist and his team said in the report that in the Q3 2010 BSF Business Confidence Index, company managers were more restrained and “more guarded now than they had been prior to the euro-zone sovereign debt crisis about the resilience and pace of the country's economic recovery.” Greater global economic uncertainty in light of the euro-zone debt crisis and volatility in oil prices over the last two months has taken a toll on sentiment among Saudi business executives, who have adopted greater caution in their outlooks for financial performance, bank lending, investment strategies and hiring plans, the report said. Oil prices fell Tuesday. Benchmark crude for July delivery lost 61 cents to settle at $77.21 on the New York Mercantile Exchange. Brent crude lost 78 cents to settle at $78.04 on the ICE futures exchange. “Although most respondents remain by and large confident about the growth potential for the domestic economy,” it added. BSF Business Confidence Index fell to 99.8 points in the third quarter from 100.7 points in the second quarter. The base value of 100 represents the third quarter of 2009. Business executives are more bearish than they were in the first and second quarters about where they see oil prices for the rest of the year. In the bank's Q1 and Q2 surveys, none of the respondents saw oil prices falling below $65 a barrel. This attitude has shifted since oil prices per barrel dropped from the mid-$80 to the mid-$60 level in May on the heels of Greece's debt troubles. Some 35 percent of business leaders expect crude prices could weaken below $65 a barrel in the next two quarters, the survey showed. Even above $60 a barrel, Gulf energy exporters, including Saudi Arabia, are more or less able to balance their fiscal budgets, however prices above $70 a barrel are needed to support longer-term investment plans, particularly in boosting oil and gas capacity. The biggest proportion of executives (45 percent) expect oil prices will range between $65-$75 a barrel in the forecast period, while only 20 percent expect prices will exceed $75 - which bodes well for Saudi Arabia's stimulatory spending program. The state has taken on the dominant role in financing strategic projects in the last year and a half. In the second quarter, a majority of respondents expected oil prices to range between $75-$80 a barrel. Business executives continue to hold a negative outlook on the prospects for bank lending in the coming two quarters, with 46.5 percent describing bank lending attitude as “not good”. Still, more than a third of business leaders foresee bank lending returning to normal over the period. Risk aversion has gripped investors yet again, with 48 percent of business leaders ranking cash holdings as the best medium-term investment prospect, ahead of bonds, real estate and equities – up sharply from 11.9 percent in the Q2 survey and is reflective of prevailing perceptions that prices of real estate and shares will most likely weaken or remain flat in the coming months. However, the report pointed out that greater vigilance does not mean businesses are bearish, only that they are mindful that the global recovery is going to be bumpy rather than smooth. The domestic economy is well-shielded from any European contagion, both because of the government's strong fiscal position and due to the country's greater reliance on Asia. Reflecting this, all respondents said they expect their companies' financial performance to either stay the same or improve in the coming six months. A slight majority of 53 percent business leaders foresee stronger financial growth for their companies over the period, down from 62.4 percent in Q2. A greater number of respondents said they expected growth to stay the same. The slower business environment is not likely to undermine company investments in capacity expansion, the report further said. Most business leaders, 53.8 percent, said they would increase production capacity in the next two quarters (against 51.6 percent in Q2). Moreover, a strong 48.9 percent of business executives expect to hire new employees in the period (down from 61.2 percent in Q2), the report noted. This upbeat employment attitude is largely a reflection of robust fundamentals in the domestic economy, where the government is spending heavily to ensure that key infrastructure projects proceed with little hindrance despite continued tight credit conditions. The lending attitude of banks has been and will continue to improve at a lethargic pace, according to respondents, whose perspectives on the potential for bank credit accessibility worsened slightly for Q3 compared with Q2. The biggest proportion of business leaders, 46.5 percent, described banks' lending attitude as “not good”, higher than the 41.5 percent who answered the same in Q2. Many business leaders though are not ruling out an increase in interest rates in the next two quarters, with 36.7 percent expecting rates to rise by more than 10 basis points (against 24.7 percent in Q2) and 14.8 percent expecting hikes of more than 20 basis points (against 13.7 percent in Q2). Almost a third of respondents still think rates will stay the same, on par with the last quarter's showing. Many were “not sure” about how the equity markets would perform. Some 38.3 percent of executives gave that answer (against 16.4 percent in Q2), while almost a third (30.1 percent) expect markets will be flat. Only 10.2 percent said they expected share prices would fall in the near-term (against 7.4 percent in Q2). By the end of May, the Tadawul index had dropped more than 13 percent from a 19-month high on April 24, prior to the escalation of the euro-zone debt crisis. BSF reduced the forecast for oil sector GDP growth in 2010 to 3.7 percent from 4.1 percent as well as the average oil price forecast for 2010 to $76 a barrel from $78 earlier. “Despite these, Saudi Arabia is on strong fiscal footing - it is likely to pay down domestic debt to 13 percent of GDP in 2010 (from 16 percent last year) and holds SR1.55 trillion ($413 billion) in net foreign assets, giving it a very comfortable cushion to draw on to finance its expansion,” Sfakianakis said in the report. However, the government sector GDP growth forecast was raised to 4.6 percent for 2010, a 13-year high, while the private sector is set to expand 3.7 percent in real terms this year. A lot of this expansion will, however, be financed through a combination of government funds and working capital that private businesses had accumulated during the boom years. Business leaders are overwhelmingly downbeat about the prospects for bank lending, regarded as a key hurdle facing Saudi economic recovery. The shift toward risk aversion in investments was also striking in the survey results. Business leaders indicated that holding cash would offer the best returns in the next six months as stock prices face an uncertain direction and real estate prices fall. Investors in regional markets will need to see oil prices stabilize above $70 a barrel and stability on global markets in order to reassess their level of risk aversion in the coming months. The passage of an imminent mortgage law, while it will take a long time in practice to implement, is also likely to catalyze interest in Saudi real estate in the medium term.
