JEDDAH: Business optimism levels in Saudi Arabia remain very positive for Q2, 2011 despite persisting uncertainty in the region, according to a survey for the Business Optimism Index (BOI) for the second quarter released on Saturday by The National Commercial Bank (NCB) and Dun & Bradstreet South Asia Middle East Ltd. (D&B). The survey of 500 business owners and senior executives revealed record levels in the nonoil sector.
The survey was conducted in March, when the global economy was posting a robust recovery, but the outlook to the growth scenario was clouded by several factors. Heightened tensions in the Middle East & North Africa (MENA) region have led to a surge in oil prices, renewed sovereign debt concerns in the euro zone, and tighter monetary policies and prospects for slower growth in major emerging markets. The disaster in Japan has further added to downside risks.
Saudi Arabia's hydrocarbon sector optimism remains strong in Q2, 2011. The overall BOI composite score for the sector is 50 versus 49 in Q1, 2011, due to a higher BOI score for the level of selling prices parameter.
The BOI score for level of selling prices is 53 in Q2, compared to 48 in the previous quarter. About 58 percent of the businesses expect prices to go up in Q2, while 37 percent anticipate no change. The net profit expectations of the industry players remain unchanged over the previous quarter, the BOI for which is recorded at 50. The BOI for number of employees has decreased marginally to 45 in Q2 from 48 in the first quarter of 2011.
An increase of 3 points in the composite index has taken business sentiments in the non-hydrocarbon sector to an all-time high. High oil prices, a robust economy and a string of new social and economic initiatives for citizens, announced by Custodian of the Two Holy Mosques King Abdullah in Q1 have strengthened the business outlook. The block of initiatives envisages higher wages and bonuses to state employees, introduction of unemployment benefits, construction of new housing projects, home finance schemes and creation of jobs.
While addressing a press conference on Saturday, Said Al-Shaikh, senior vice president and group chief economist of the NCB, said: "The BOI survey results broadly reflect the newly announced fiscal package by King Abdullah, which is amounting SR500 billion, as the impact on the wider economy is likely to be substantial, especially on the non-hydrocarbon sector. Saudi companies expect business conditions to improve further in the near term, as all the indices reflected increases."
However, he said, the new current and capital expenditure plans are expected to boost demand even further, and these will add to the inflationary pressures in 2011. Moreover, the improved business outlook was feeding more enthusiasm by companies in the non-hydrocarbon, as the Q2 results showed that 53 percent of companies intend to invest in business expansion compared to 45 percent in Q1, 2011, Al-Shaikh added.
He expects the housing market to improve in two years time as the spending package also put an emphasis on the housing sector. He said about 40 percent own houses in the Kingdom while 60 percent don't. "The recently announced spending package will help resolve the bottleneck in the housing market by 2013-14," he said, adding at present there is also pressure on rents due to housing shortage but once the housing market improves, it will help reduce rents in the Kingdom.
Al-Shaikh expects that with higher oil production, expected to reach 9 million barrels a day in 2011, Saudi Arabia will see a 5.8 percent GDP growth. Its nonoil sector will also rise by 5 percent as the government pushes forward with infrastructure projects.
The recent package will boost the Kingdom's public spending to an all-time high this year but the budget will still record a surplus. The rise in oil output, coupled with greater state spending commitments, has also heightened the prospects for higher GDP growth this year. Further, higher oil exports and higher energy prices will help the country achieve a favorable current account balance this year, the survey showed.
The BOI survey reveals that the Saudi non-hydrocarbon sector is expecting a rise in demand levels in the second quarter of this year. The BOI for the volume of sales has registered a value of 78 compared to 75 in Q1, while the BOI for the new orders parameter is up by 4 points to 78. The BOI for level of selling prices stands at 46 in Q2, up from 42 in the last quarter. Saudi Arabia's annual inflation slowed to a 10-month low of 4.9 percent in February, with growth in housing and transport costs subsiding. However, the huge expenditure planned by the government is likely to build up inflationary pressure in the coming months.
The transport and communication sector is most optimistic with respect to demand conditions in Q2, recording the highest BOIs for volume of sales and new orders. The transport and communication sector is most optimistic regarding profits, along with the construction and finance, and real estate and business services sectors.
Outlook regarding factors likely to adversely influence business operations in Q2 reveals upbeat business sentiments. About 55 percent of the respondents do not anticipate any negative factors coming into play in Q2 2011. Availability of skilled labor is a key concern for 21 percent of the firms, while 14 percent expect that availability of finance will impact business operations in Q2. Fifty-three percent of the firms plan to invest in business expansion; this figure has increased compared to the previous quarter.
Results from the survey suggest that the manufacturing sector outlook has improved further in Q2. The composite index for the manufacturing sector stands at 70 in Q2, 2011, the joint highest score in the series, achieved in Q1, 2010. The composite index for construction sector has gone up to 71 in Q2 from 66 in Q1 and is at the highest level for the series. The demand outlook for this sector has surged in the second quarter.
Saudi Arabia is spending massively on projects to diversify its economy away from reliance on hydrocarbons. The Ninth Development Plan sets out an investment of SR1.44 trillion between 2010 and 2014, of which 7 percent of investment will go to housing projects. Around 19 percent of the funds will be devoted to health care, with plans to open 117 hospitals and 750 primary care units. Education will also form a substantial part of the plan, with construction of vocational schools and colleges on the agenda.
The Kingdom's hospitality sector continues to grow, driven by religious tourism as well as business travel, given Saudi Arabia's status as the world's largest oil exporter. At 61 in Q2, the composite index has retreated by 7 points from the Q1 figure, but is at the second highest level in eight quarters.
Commenting on the findings of the survey, Phil Strange, chief financial officer of D&B, said: "Business optimism levels in Saudi Arabia remain very positive. All sectors recorded improvement in Q2 from already elevated levels of optimism with the exception of trade and hospitality, which saw a small fall albeit still remaining in very positive territory. The spike in oil prices and the governments' increasing stimulation of the nonoil sector are causing the business community to remain extremely bullish in their outlook."
When asked about the rising unemployment level in the Kingdom, Al-Shaikh said the Kingdom is doing every possible thing to reduce the joblessness. "Now there will be pressure on players in the private sector to employ more Saudis," he said, adding that the growing Saudi economy will also create more jobs.
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