Highlights:
- The Composite Index for the non-hydrocarbon sector rises to 65; an all-time high
- Businesses in the non-hydrocarbon sector anticipate strong demand conditions in the first quarter of 2011; BOI for Volume of Sales has gained 16 points, BOI for New Orders is up by 18 points
- The Composite Index for hydrocarbon sector has tracked sideways, decreasing 2 points to stand at 49 points.
JEDDAH ? The National Commercial Bank, in association with Dun and Bradstreet South Asia Middle East Ltd (D&B), has released the Business Optimism Index for Saudi Arabia for the first quarter of 2011.
Background to the Survey
The survey for the Business Optimism Index for Q1 2011 was conducted in December 2010, amidst global economic recovery and projections of strong growth in the current year. Global economic recovery will continue to be characterized by dual speed growth. While emerging and developing economies are predicted to grow at 6.4% in 2011, the Euro zone and Japan will grow at 1.5% and the US at 2.3%. Down side risks however still remain: 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% in 2010 to 6.4% 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. 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 the findings of the survey Phil Strange, CFO of Dun and Bradstreet South Asia Middle East Ltd:
"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. One caution in this strong story is the prospect of higher inflation"
Hydrocarbon Sector
The BOI survey suggests that Saudi Arabia?s hydrocarbon sector optimism holds steady in the first quarter of 2011. The overall BOI composite score for the sector is 49 versus 51 in Q4 2010, due to a lower BOI score for the Level of Selling Prices parameter. The average price of the OPEC basket was USD 88.50 per barrel in December 2010, the highest monthly average in two years. As this optimism survey was conducted at this time, strong and steady oil prices have led respondents to predict the same trend in the short term. The BOI score for Level of Selling Prices is 48 points in Q1 2011, compared to 65 points in the previous quarter. Meanwhile, 42% of the businesses expect prices to remain unchanged in Q1 2011, while 53% 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.
Non hydrocarbon Sector
The BOI survey reveals 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 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% 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. The strength of expectations in these key areas 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.
Factors Impacting Business
Raw material costs continue to be the top concern for non-hydrocarbon firms in Q1 2011: 58% 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% citing it accordingly. Availability of finance will prove to be a worry for 13% of the respondents, while higher property prices and rents will impact 8% of the businesses.
Business expansion plans have improved in Q1 2011 compared to Q4 2010 sentiments; 45% of the non-hydrocarbon companies have said that they would invest in business expansion in Q1 2011, the number has increased from 37% in Q4 2010.
Commenting on the findings of the survey, Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of the National Commercial Bank, 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. Respondents to the survey in the non-hydrocarbon sectors expect volume of sales to be strengthening, with a widespread expectation of rising selling prices. Therefore, as expected 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. Meanwhile, the survey results broadly reflect the satisfaction of the Saudi business community with kingdom?s economic policies, especially the recently announced expansionary 2011?s budget that continued to emphasize spending on social and physical infrastructure. Moreover, the improved business outlook was feeding more enthusiasm by companies in the non-hydrocarbon to invest in business expansion, as the results indicated, and accordingly, this should lead to more hiring".
The D&B Business Optimism Index is widely recognized as a key measure of the pulse of the business community, serving as a reliable benchmark for investors, policy makers and other observers of the economy worldwide. As the latest addition to D&B's global series, the Business Optimism Index on Saudi Arabia, done in association with The National Commercial Bank, is issued on a quarterly basis. The next Business Optimism Index on Saudi Arabia will be released in April 2011.
 BOI - KSA Q1 2011 Press Release
BOI - KSA Q1 2011 Press Release - Arabic
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