Highlights

• The Composite Index for the non-hydrocarbon sector has increased to 60, 8 points higher than the Q3 figure.
• Construction and Trade & Hospitality sectors show improvement in outlook; moderation in Manufacturing sector.
• Composite Index for the hydrocarbon sector remains steady at 63, due to an increase in the BOI for Number of Employees but a drop in the other two parameters.

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 fourth quarter of 2011.

Background to the survey

The survey for the Business Optimism Index for Q4 2011 was conducted in September 2011, amid an environment of significant slow-down in global economic growth, which shows little sign of accelerating. There has been a weakening in global demand and trade as well as deterioration of business and consumer sentiment. The economic recovery in the US has become sluggish, and there has been some moderation in growth in emerging market economies. The Euro zone sovereign debt crisis has intensified and as a result financial market conditions have weakened sharply. The soft patch that analysts predicted in the spring is now likely to deepen. The latest manufacturing PMI readings confirm the weak outlook. In its September 2011 World Economic Outlook, the IMF has revised down both 2011 and 2012 global GDP growth expectations to 4% from the June 4.3% and 4.5% estimates, respectively. The downward revisions have mainly come from the developed market economies. The IMF has estimated that developed countries as a group will grow 1.6% and 1.9% in 2011 and 2012 respectively, down from the 2.2% and 2.6% estimates in June. This is over a percentage point lower than the 3.1% growth rate registered in 2010, the first full year of recovery from the global recession. Growth in emerging markets however remains relatively resilient. The IMF has also revised down the growth outlook for the emerging markets, but to a lesser extent.

Commenting on the findings of the survey Manjeet Chhabra, General Manager, Middle East of Dun and Bradstreet South Asia Middle East Ltd:

'Saudi firms remain quite optimistic about the business outlook for fourth quarter; the hydrocarbon composite index is at an all-time high of 63 and non-hydrocarbon index is at 60, which are good scores. In the non-hydrocarbon segment, the construction and trade & hospitality sectors are very bullish about the short term. The construction sector's optimistic outlook reflects the boost in confidence from the government's planned expenditure in housing and other infrastructure projects. However, some moderation in outlook is observed for the manufacturing and transport & communications sectors. The hydrocarbon sector remains very bullish as well, reflecting the increased crude oil output in recent months as well as the high oil prices. Most respondents in the hydrocarbon sector are expecting higher selling prices in the next quarter despite obvious signs indicating a slowdown in global growth. Inflation is becoming a cause for concern for respondents surveyed in September.'

Hydrocarbon sector

The BOI survey reveals that Saudi Arabia's hydrocarbon sector optimism remains strong in Q4 2011. The overall BOI composite score for the sector is 63, the same score as in Q3 2011, due to a higher BOI score for the Number of Employees parameter which offset the lower BOI scores for the Net Profits and Level of Prices parameters. With respect to the Level of Selling Prices parameter, 63% of the respondents expect prices to rise further, while 34% anticipate that prices will remain unchanged in Q4. Just 3% of the respondents anticipate a drop in prices in Q4, which is surprising amid the weak global economic scenario. The BOI score for Level of Selling Prices is 60 in Q4 2011, compared to 65 in the previous quarter. The Net Profits expectations of the industry players have shown some moderation from the previous quarter, the BOI for which is recorded at 58, compared to 65 in the last quarter. The BOI for Number of Employees has increased to 75 in Q4 2011 from 55 in the third quarter of 2011, which is probably due to the massive expansions planned in the sector.

Non-hydrocarbon sector

The BOI survey reveals a rise in the composite index, despite a gloomy outlook for the global economy in the current year. The increase in the value of the composite index is due to a rise in the BOI values of five parameters; the only exception being the New Orders parameter. The BOI for the Volume of Sales parameter has registered a value of 70 compared to 61 in Q3 2011, while the BOI for the New Orders parameter is down by just a single point to 61. The BOI for Level of Selling Prices stands at 52 in Q4 2011, up from 34 in the last quarter. Saudi Arabia's annual inflation was 4.7% in Q2 2011, mainly due to an increase in inflation rates of the group of renovation & rent, goods & other services and food & beverages.

The improvement in expectations in demand and prices has helped increase expectations for profits and inventory levels. The BOI for the Net Profits parameter is recorded at 67 in Q4, up from 57 in the third quarter. Respondents are more optimistic with respect to inventories compared to the third quarter; the BOI for Level of Stock stands at 43 in Q4 2011, up from 36 in the previous quarter. The BOI for Number of Employees has also increased, gaining seven points from 44 in the last quarter.

Factors impacting business

Outlook regarding factors likely to adversely influence operations in Q4 2011 reveals a favorable business environment. 46% of the respondents do not anticipate any negative factors coming into play in the fourth quarter of 2011. Availability of skilled labor remains an important concern for 25% of the firms, while 11% expect that availability of finance might impact business operations in Q4 2011. 14% of the businesses are concerned about inflationary factors in the short term. 51% of the firms plan to invest in business expansion compared to 48% in the previous quarter.

Commenting on the findings of the survey, Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of the National Commercial Bank, said, "Businesses in Saudi Arabia plan to continue hiring despite a gloomy global economic outlook for the remaining of the year. Of the non oil and gas companies surveyed, 53% plan to increase their headcounts in the 4thQ, whereas 45% are foreseeing no change in the number of employees. It is even more pronounced in the hydrocarbon sector, where 75% of respondents expect to increase their headcounts, while 25% anticipate no change. It is also apparent that the continued improvement in credit conditions along with strong government investment in infrastructure to have positively influenced the level of construction activates, as demonstrated by the rise in the BOI of the sector to an all time high of 74 points. Moreover, 70% of firms surveyed are expecting an increase in net profits in 4thQ, with the BOI of net profits rising to 67 points. Reflecting overall continued optimism, 51% of the non oil and gas sector companies indicated they would invest in business expansion in 4thQ 2011, up from 37% in the 4thQ 2010".

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 January 2012.