Outlook cautious among Saudi Arabian firms in the final quarter of 2015

At -4, the composite BOI for Saudi Arabia’s hydrocarbon sector has slipped to the lowest level; the BOIs for selling prices and net profits are also in the negative territory.

The non-hydrocarbon sector’s composite BOI has retreated by 3 points from the previous quarter to 33 in Q4, 2015 due to weaker forecasts for selling prices, profits and hiring.

The trade & hospitality sector is most optimistic for the fourth quarter, while the transport segment is the weakest.

Competition and impact of low oil prices are the chief concerns for Saudi Arabian firms
Non-hydrocarbon sector firms are more optimistic about investment in business expansion, whereas oil & gas firms have lowered their outlook.

Jeddah – Dun & Bradstreet South Asia Middle East Ltd (D&B) in association with the National Commercial Bank released the D&B Business Optimism Index (BOI) survey for Saudi Arabia for Q4, 2015. The BOI survey reveals lower optimism levels for firms in Saudi Arabia.

Background to the survey

Crude oil prices are expected to remain flat during the fourth quarter, with the OPEC’s decision to keep pumping to maintain its market share and lack lustre global demand. The IMF downgraded its global economic outlook once again, from its previous forecast of 3.3% to 3.1% for 2015. According to the IMF, a slowdown in emerging markets is pushing the world economy into its weakest expansion since the financial crisis. Modest growth in the US and a meagre recovery in the Euro zone, meanwhile, have not been able to offset falling output in emerging markets. Since the beginning of August, the OPEC basket has remained below US$ 50 per barrel, pressured by various factors. Softening economic growth in China, highlighted by subdued PMI manufacturing numbers, the huge stock market sell-off and loss of confidence in its petroleum consumption have led to a bearish sentiment in the market. US crude oil inventories are near 80-year highs, with the commercial crude stock at over 454 million barrels. Additionally, improved drilling efficiencies and technologies have continued to keep US supplies at high levels, even though the number of drilling rigs in operation continues to decline each week. Another factor pressuring oil prices is the Iran Nuclear Deal and the new supply that will be coming into the market as a result, although the impact of the deal is still uncertain as estimates of Iran’s production potential vary greatly.

Despite low oil prices, Saudi Arabia has maintained crude oil production above 10 million bpd as it hopes lower oil prices will stimulate Asian demand and hit rival production in the US that is expensive to produce. Also, Saudi Arabia recently made deep reductions to the prices it charges for its oil, hard on the heels of cuts made last month by rival producers in the Gulf. The decline in oil prices is resulting in substantially lower export and fiscal revenues for the government.

Commenting on the findings of the survey, Mrs. Sharihan AL-Manzalawi, Economist of the National Commercial Bank , said, “While The Kingdom’s business sector continues to moderate due to the sharp fall in oil prices, the business optimism index (BOI) for the non-hydrocarbon sector edged down in Q4, 2015, to register 33 points compared to 36 points in the previous quarter. Although Views on selling prices, and net profits retreated. This positive outlook despite the lower prices is largely attributed to growth momentum of previous year, and also to the pace, yet moderate, of government spending. The trade and hospitality segment is the most optimistic for Q4, 2015, while the transport sector holds the weakest outlook. But, as expected, the BOI for the hydrocarbon continues to deteriorate since the fourth quarter of last year , slipping into the negative territory to record -4 points for Q4,2015, which is the lowest level since the beginning of the series. In line with the cautious outlook, the views of the business environment is only slightly less optimistic as 49% of the participants cited no negative factors in the final quarter of 2015 compared to 53% in Q3,2015. The hydrocarbon firms have lowered their expectations in terms of business expansion plans, as 30% of the sector’s respondents will invest to expand their businesses compared to 43% in Q3,2015″.

Hydrocarbon sector

The survey for Q4, 2015 shows that oil & gas firms in Saudi Arabia are cautious about the outlook for the fourth quarter, with the composite BOI slipping into negative territory and recording the lowest level since the beginning of the series. The composite BOI for the hydrocarbon sector stands at -4 for Q4, 2015 compared to 9 in Q3, 2015 and 34 a year ago. While the indices for selling prices and profitability are negative, the employment outlook has firmed up compared to the previous quarter. 28% of the hydrocarbon sector respondents anticipate lower selling prices in Q4, 2015 due to competition, low demand or decline in oil prices. A fewer 13% expect their prices to increase, resulting in a BOI of -15. Lower selling price expectations have led to a decline in optimism for net profits, with the BOI dropping from 23 in Q3, 2015 to -8 in Q4, 2015. However, 28% of the survey participants hope to hire new employees during the fourth quarter in anticipation of new projects, while 5% foresee a decline in their staff count. The BOI for number of employees stands at 23 in Q4, 2015, compared to 20 in Q3, 2015 and 32 in Q4, 2014.

Despite the soft outlook for selling prices and profits, a sizeable proportion (49%) of the firms has indicated that they do not expect any factors that might impact their operations during Q4, 2015 against 53% in the last quarter. Impact of oil prices remains the foremost concern for this sector, as cited by 30% of the firms; 10% are concerned about competition and 5% expect the lack of new projects to hurt their businesses.

30% of the firms intend to invest in business expansion in Q4, 2015 compared to 43% in the previous quarter.

Non-hydrocarbon Sector

The current survey shows that the composite BOI for the non-hydrocarbon sector for Q4, 2015 (33) has retreated by 3 points when compared to the last quarter (36 in Q3, 2015) and by 14 points vis-à-vis the same quarter a year ago (47 in Q4, 2014). On an annual basis, all parameters have posted declines. On a quarterly basis, while the demand indicators (volume of sales and new orders) have advanced marginally, the indices for selling prices, profits and hiring are slightly lower. Expectations of new projects and customers and higher demand from existing customers (including the seasonal increase in demand) have supported the stronger expectations for volumes and new orders. The BOI for volume of sales has advanced from 42 in Q3, 2015 to 43 in Q4, 2015 whereas the index for new orders has firmed up from 47 to 49 over the same period. The index for selling prices has retreated from 12 in Q3, 2015 to 4 in Q4, 2015 as a majority (72%) of the firms anticipate stability. The BOI for net profits has slipped from 39 in Q3, 2015 to 35 in Q4, 2015. The employment outlook is also weaker, with the BOI for number of employees decreasing from 38 in Q3, 2015 to 33 in Q4, 2015.

Sector-wise Analysis

The trade and hospitality sector’s business outlook for Q4, 2015 has strengthened from the previous quarter, but is weaker when compared to the forecast a year ago; the composite BOI is at 40 in Q4, 2015 against 32 in Q3, 2015 and 53 in Q4, 2014. The demand indicators have recorded an upswing, selling prices have stabilized, while the hiring parameter has slipped. Despite the improvement in the composite BOI, the business environment optimism has weakened in Q4, 2015, with 53% of the trade & hospitality firms not expecting to face any obstacles to their operations versus 62% in Q3, 2015. The business expansion outlook has moderated; 40% of the firms in the trade & hospitality sector plan to invest in business expansion in Q4, 2015 compared to 41% in Q3, 2015.

The forecast for the finance, real estate & business services sector has weakened both on a quarterly and annual basis. The composite BOI of 32 in Q4, 2015 is 8 points lower than the index in Q3, 2015 and 13 points below the index in Q4, 2014. All parameter scores have slipped in the current quarter. The business environment outlook has deteriorated compared to the previous quarter; 59% of the firms in this sector have indicated that they do not expect any hindrances to their business operations during Q4, 2015; the corresponding proportion was 63% in Q3, 2015. The business expansion outlook has improved; 40% of the respondents expect to undertake such investments, up from 35% in Q3, 2015.

The manufacturing sector’s outlook for Q4, 2015 has moved back in comparison to the previous quarter’s forecast and also with respect to the fourth quarter of 2014. The composite BOI stands at 31 in Q4, 2015 against 36 in Q3, 2015 and 40 in Q4, 2014. The overall q-o-q retreat in outlook can be attributed to a decline in most parameters coupled with competition, lack of new projects and falling in oil prices. Manufacturing firms have forecast a weaker business environment outlook in Q4, 2015 compared to the previous quarter; 53% of them do not expect to face any hindrances to their business operations in Q4, 2015 compared to 76% in Q3, 2015. However, 44% of the firms hope to invest in business expansion in Q4, 2015; the corresponding proportion for the previous quarter was 34%.

The construction sector’s composite BOI has dropped to 31, the lowest level in the series since Q3, 2009, when it stood at 30. The global slowdown in economic activity, competition and limited new projects has adversely impacted the sector. The business environment outlook has also weakened compared to the previous quarter; 51% of the construction firms do not expect to face any hindrances in Q4, 2015 compared to 63% in Q3, 2015. 43% of the firms intend to invest in business expansion in Q4, 2015 against 44% of the firms in Q3, 2015.

The composite BOI for the transport, storage & communications sector has posted a modest increase from 27 in Q3, 2015 to 29 in Q4, 2015, but remains significantly lower than the index score of 49 in Q4, 2014. On a quarterly basis, the indices for volumes, new orders, net profits and hiring have increased, but that for selling prices has dropped. The business environment optimism has weakened from the level observed in Q3, 2015; 57% of the firms do not expect to get impacted by any negative factors during Q4, 2015 compared to 72% in Q3, 2015. Business expansion plans have however firmed up; 40% of the respondents intend to undertake such investments in Q4, 2015 versus 32% in Q3, 2015.

For Q4 2015, large companies are more optimistic than the SMEs, with composite BOI scores of 34 and 31 respectively. Large companies are more optimistic than SMEs with respect to volumes, new orders, net profits and hiring. However, SMEs hold a stronger outlook with respect to selling prices. Both groups have a similar outlook with respect to the business environment; 53% of the SMEs and 55% of the large companies indicated no expected hindrances to their operations during Q4, 2015. While the foremost concern for SMEs is competition, large companies are most concerned about the impact of oil prices.

54% of the firms in the non-hydrocarbon sector anticipate no negative factors will pose an obstacle to their business operations in Q4, 2015 compared to 69% in Q3, 2015. Competition (11%), impact of oil prices (10%), availability/cost of skilled labor (5%) and government regulations (5%) have been cited as key hindrances for Q4, 2015.

Business expansion plans amongst Saudi Arabia’s businesses have strengthened; 42% of the firms intend to undertake such investments in Q4, 2015 versus 37% in Q3, 2015.

Factors Impacting Business:

Respondents in the hydrocarbon sector are slightly less optimistic as 49% of the participants cited no negative factors in the final quarter of 2015 compared to 53% in Q3, 2015. The impact of fluctuating oil prices continues to be the topmost concern impacting business operations followed by competition (10%) and the limited new projects/delays in executing projects (5%). 3% of the respondents in each case highlighted the lack of skilled labor and the regional political uncertainty as factors impacting their business.

Consistent with the moderation in overall outlook, the share of firms in the non-hydrocarbon sector that are positive about the business environment has decreased. 54% anticipate no negative factors will pose an obstacle to their business operations in Q4, 2015 compared to 69% in Q3, 2015. Competition (11%), impact of oil prices (10%), availability/cost of skilled labor (5%) and government regulations (5%) have been cited as key hindrances for Q4, 2015.

Hydrocarbon firms have lowered their expectations in terms of business expansion plans; 30% of the sector’s respondents said that they will invest in expansionary activities compared to 43% in Q3, 2015. While 45% will not undertake such plans (versus 50% in the previous quarter), 25% are unsure of the same.

In contrast, sentiments in the non-hydrocarbon sector are slightly more optimistic about investing in business expansion plans; 42% of the participants intend to undertake such plans compared to 37% in Q3, 2015. Manufacturing firms (44%) are very optimistic in this regard, followed by the construction sector firms (43%).

Commenting on the findings of the latest survey Rajesh Mirchandani, Chief Executive Officer, Dun and Bradstreet South Asia Middle East Ltd. said:

“Firms in Saudi Arabia continue to witness lower optimism levels. The BOI score for the hydrocarbon sector stands at -4, the lowest in the series. In line with the cautious outlook, sentiments with reference to the business environment have also deteriorated with 49% expecting no obstacles to their business operations during Q4, 2015 compared to 53% in Q3, 2015.

In tandem with the overall weakening sentiments, the BOI for the non-hydrocarbon sector has slipped to 33 in the current quarter, compared to 36 in Q3, 2015. Most parameters constituting the index have moderated. Coupled with this, 54% anticipate no negative factors will pose an obstacle to their business operations in Q4, 2015 compared to 69% in Q3, 2015. The survey also shows that the trade and hospitality segment is the most optimistic for Q4, 2015, while the transport sector holds the weakest outlook. Competition and the impact of oil prices are the leading challenges for both the hydrocarbon and non-hydrocarbon sectors.

Sentiments in terms of business expansion plans remain mixed. A lower proportion of hydrocarbon sector firms intend to invest in business expansion – 30% in Q4, 2015 compared to 43% in the previous quarter. Meanwhile, a higher proportion of the non-hydrocarbon sector respondents will undertake such activities; 42% of the in Q4, 2015 versus 37% in Q3, 2015.”

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 2016.

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