JEDDAH: Despite the downside risk in an otherwise recovering global economy, the business climate in Saudi Arabia remains bright as shown by the latest business survey. The survey of “Business Optimism Index for Q1 2011” prepared by The National Commercial Bank (NCB), in association with Dun and Bradstreet South Asia Middle East Ltd (D&B), which was unveiled Saturday showed that, overall, the Saudi Business Optimism Index registered “sharp increase” amid strong fundamentals. The survey results broadly reflect the satisfaction of the Saudi business community with the Kingdom's economic policies, especially the recently announced expansionary 2011's budget that continued to emphasize spending on social and physical infrastructure. The improved business outlook was feeding more enthusiasm by companies in the non-hydrocarbon to invest in business expansion that should lead to more hiring, the survey said. Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of NCB, said “the 1Q BOI is indicating that more Saudi companies expect business conditions to improve further in the near term, as all the indices reflected increases, yet with varying degrees across the different non-hydrocarbon sectors.” In the oil exporting countries of the Middle East, strong and steady oil prices in the fourth quarter of 2010 and an upturn in domestic consumer demand has led to a surge in business sentiment in early 2011. Commenting on concerns about the would-be impact of the current precarious developments in a number of North African and Middle Eastern countries, Al-Shaikh asserted that the situation unfolding there has no immediate bearing and has “no direct implication on the Gulf economy, noting that the formidable fundamentals in the Gulf region “are the envy” of the world. He said, in particular, that the huge infrastructure spending being undertaken by the Saudi government provides further stimulus for continuous economic growth. The upward movement of oil prices in the international markets provides more confidence in the economic outlook, he noted. ICE Brent crude in London for March delivery settled close to $98 a barrel over the week. US crude oil for March delivery hovered near $89 a barrel for the week. The average price of the OPEC basket was $88.50 per barrel in December 2010, the highest monthly average in two years. The current oil prices were well above the $58 benchmark used in the latest Saudi budget. The BOI survey showed that Saudi Arabia's hydrocarbon sector optimism remained firm in the first quarter of 2011. Meanwhile, 42 percent of the businesses forecast prices to remain unchanged in Q1 2011, while 53 percent anticipate an increase. The net profits expectations of the industry players have improved, the BOI for which is recorded at 50 points as against 46 in the last quarter. The BOI for number of employees has increased to 48 points in Q1 2011 from 28 in the fourth quarter of 2010. In support of the survey, Phil Strange, CFO of Dun and Bradstreet South Asia Middle East Ltd., said the survey painted a “very optimistic” note, amid projections of global economic and projections of strong growth in the current year. “The vast majority of businesses surveyed in December are expecting increased orders, revenues and net profits with consequent increases in employment and stocks. These expectations are reflected broadly across all sectors of the economy. The hydrocarbon sector is alone in not recording a significant gain over prior quarter and this largely as a result of respondents predicting that the oil price will stabilize in Q1, consolidating the large gains made last year, as opposed to continue to rise. However, sentiment in the sector remains in very positive territory. A strong recovery in the oil price, increased demand, global economic recovery and government spending on the infrastructure are clearly combining to make the Saudi business community very optimistic about short-term prospects,” he said. Against this backdrop, though, “is the prospect of higher inflation,” he added. Al-Shaikh said food, house rents and transport costs are the major inflationary factors. He said house rents go up following the law of supply and demand, noting that speeding up the construction of more affordable houses would curb the northbound inflation. He suggested that more funds should be extended to real estate applicants to tackle the backlog. At present, there are some 600,000 applicants for housing loans, he added. The optimism for level of selling prices has increased in line with the rising inflationary pressures in the Saudi economy. Annual inflation stood at 5.8 percent in November 2010 due to rising housing, food and transportation costs. The BOI for level of selling prices stands at 42 points in Q1 2011, up from 37 in the last quarter. He hinted that the passage of the long-awaited mortgage law might be in mid-2011. Weak currency exchange further compounds the inflation level. However, Al-Shaikh is quick to defend the current currency peg, saying that riyal's peg to dollar is anchored on “long strategy” and “it is not appropriate” (this time) to change it. Nevertheless, the reduction in documentation and transaction fees in government agencies is one way of easing inflation impact, Al-Shaikh noted. The latest BOI survey also revealed that the Saudi non-hydrocarbon sector is expecting a surge in demand levels in the first quarter of 2011. The BOI for the volume of sales has registered a value of 75 points compared to 59 in Q4 2010, while the BOI for the new orders parameter has jumped to 74 points from 56. The strength of expectations in non-hydrocarbon sector is also driving expectations for profits and employment. Strong sales expectations are flowing through to profits, with this index rising to 75 points. Respondents expect to take on new staff to meet the expected rise in activity. The BOI for number of employees stands at 57 points in Q1 2011, up from 42 in the previous quarter. The BOI for level of stock remains virtually unchanged, declining by just 4 points to 41 from 45 in the fourth quarter. Meanwhile, raw material costs continue to be the top concern for non-hydrocarbon firms in Q1 2011: 58 percent of the respondents have cited it as the leading concern. Shortage of skilled labor remains the second most important concern for the respondents, with 21 percent citing it accordingly. Availability of finance will prove to be a worry for 13 percent of the respondents, while higher property prices and rents will impact 8 percent of the businesses. Nonetheless, business expansion plans have improved in Q1 2011 compared to Q4 2010 sentiments; 45 percent of the non-hydrocarbon companies have said that they would invest in business expansion in Q1 2011, the number has increased from 37 percent in Q4 2010. Respondents to the survey in the non-hydrocarbon sectors expect volume of sales to be strengthening, with a widespread expectation of rising selling prices. Yet, the biggest concern of businesses is the rising of raw material prices. While this will likely lead to rising net profits, as the survey results point to in the short term, however, it might contribute to slower demand in the medium term. Globally, the downside risks still remain, the survey said, such as the structural challenges of indebted countries in Europe, the weakness of the financial sector and the malaise of the US housing market. Also, some softening is likely in emerging and developing economies, where growth is expected to decelerate from 7.1 percent in 2010 to 6.4 percent in 2011. The central banks of most industrialized countries are likely to keep policy rates on hold in 2011. By contrast, with strong growth and rising inflation pressures, tightening should be widespread across emerging economies in Asia and Latin America.
