RIYADH: Saudi Arabia’s economy is not isolated from the global economic recession and neither are businesses in the Kingdom. The expected downturn in the economy is clearly reflected in our Q1 survey, revealing that business confidence in Saudi Arabia is weakening further. Against the backdrop of precipitously worsening global economic data, it would appear hard not to expect Saudi businesses to anticipate worsening conditions. Some 42 percent of businesses expect growth in their organization, compared to 54 percent in our previous survey. The survey took place after the announcement of the budget in late December 2008 which should have provided a cushion of hope.
From our survey of 765 companies (previously 623) across diverse industry sectors:
• As mentioned above, 42 percent of respondents expect business growth in Q2 and Q3 2009, but it should be noted that this is down from the 89 percent reported in Q3 20008
• Only 24 percent report a rise in production capacity (compared to 53 percent in Q4 2008), the change does mark a noticeable decline which has been ongoing since second half of 2008. Going forward, 18 percent of respondents do expect production capacity to fall in Q2 and Q3 2009 and 58 percent expect it will remain the same
Overall, the business environment is clearly showing signs of a slowdown with 57 percent anticipating that business growth to remain the same and 43 percent expecting it to be weaker. Nobody is expecting business growth to get significantly weaker, which is indicative of things not getting worse in the future.
The impact of the global recession seems to worry businesses in the Kingdom. Only 7 percent of those surveyed do not expect the Saudi economy to be affected, while 23 percent expect that it will indeed be affected and another 66 percent that it might.
Growth
As the global economy and particularly the prospects of a 2009 recovery in the US and/or euro zone appear close to nil, the Saudi economy is not cocooned from the impact of the global crisis. As such, the SABB Index figure continues to decline.
SABB’s latest findings reveal that business confidence is down to 89.2 (from 96.4) — a 7.47 percent decline, compared to a 3.8 percent in Q4 2008. The survey attributes this to a number of factors, including:
a) The slowdown in growth for businesses continue expect
b) The further fall in oil prices in Q1 2009
c) The anemic performance of the local stock market, coupled with the worsening global economic environment
Oil prices are falling
When businesses were surveyed this time, oil prices were in the mid to high $30s. Majority of those surveyed (54 percent) expect prices to stay the same, only 28 percent expect prices to rise and 18 percent expect oil prices to fall under $35. It seems that the market is pessimistic about oil prices which impinge on economic expectations in the Kingdom.
Price expectations
Market expects prices to fall. SABB noted in its previous confidence report that there are mixed signals about business vulnerability in certain sectors (autos) and a slowdown in others (consumer electronics). We were not able to ascertain if seasonal factors could account for the slow pace in demand or there were other structural factors that were unfolding. What does demand have to do with prices?
We decided to investigate the anecdotal evidence we had accumulated over the past few weeks that demand for several consumer goods was declining due the market’s expectation that prices will fall.
Hence, we first asked if businesses are considering lowering prices over the next two quarters. Most (39 percent) responded that prices will be kept the same, followed by 35 percent who are considering lowering prices. A minority of 14 percent are not sure, while 12 percent are considering increasing prices. We then wanted to dig a bit further and see what businesses expect in car prices. Not only how this impacts on fleet sales to the private sector, but also how one segment of society perceives the behavior of prices. Seventy percent of the respondents expect car prices to fall in the next two quarters and only 25 percent expect to stay the same.
The expectation of lower prices on several goods, including autos, is reflected on the general expectation of falling inflation. Most of the respondents (69 percent) expect inflation to fall over the next two quarters which we perceive as good for business, and positive for the final tally in the Index.
Saudi riyal
Not much excitement on the currency front for speculators, but good news for business predictability. It’s no surprise that most businesses find the currency issue far less worrying than it was prior to the summer. With 88 percent of respondents not expecting the riyal to be revalued, and only 5 percent of respondents expecting a change in the next two quarters, we ascertain that the revaluation debate is of little concern to the business community. We also felt it would be pertinent to ask again how businesses view the prospect of a GCC currency union by 2012. Most of the respondents (77 percent) say they do not expect the union to take place by that date, against a slightly lower response (73 percent) in the previous Index report.
Real estate
There is some good news. The survey shows that rising real estate prices seem not to pose a worry for companies across the Kingdom. In the survey, we have witnessed a substantial shift in expectations as only 7 percent of respondents (46 percent in Q4, 68 percent in Q3) say they anticipate the cost of real estate to appreciate, resulting in a positive impact on their business in the next two quarters. Some 50 percent of companies expect real estate prices will fall in the next two quarters against 31 percent that was noted in Q4. And 38 percent of respondents expect real estate prices to remain the same over the next two quarters.
The above indications could signal a structural shift in the real estate market, which could translate into lower business rents and an overall correction in real estate prices. We also take the view that movements in the regional real estate markets will impact on Saudi Arabia and bring down property prices in 2009.
Labor market
The good news is for employers not employees. The availability of human resources is an added concern for businesses, as labor supply constraints can limit expansion in the non-oil private sector. It’s evident that the labor market is no longer facing a dearth of skilled work force. Among our survey respondents, only 14 percent (26 percent in Q4 and 49 percent in Q3) report that their organizations do not have all the required staff and just 5 percent (10 percent in Q4 and 20 percent in Q3) expect to be “very insufficiently” staffed in the next few quarters.
Overall, employers seem to be improving on the labor supply front, as 77 percent (41 percent in Q4 and 22 percent in Q3) regard their companies as adequately staffed.
We also decided to ask a more sensitive question about employment as we tried to gauge labor market hiring trends. In part, it serves to reinforce or discount the responses we get about our aforementioned question on labor supply in the economy. As the slowdown in the economy is unfolding we are not surprised with 74 percent of the respondents who expect over the next two quarters to institute a hiring freeze.
Twenty-six percent of the businesses we surveyed expect to hire over the next two quarters.
Bank lending
Lending appetite could be winding down as banks become liquid. Forty-one percent of respondents expect bank lending to be “accommodating” this quarter (up from 33 percent in Q4 and 38 percent in Q3), with no-one responding “highly positive” which is the exact similar response to the one we got in Q4. Some 32 percent of those surveyed responded as “not so severe” which is a big difference from the 25 percent noted in the previous quarter. However, the big change is our last question which brings light of hope. Some 27 percent believe that bank lending would be severe, unlike 42 percent who asserted in the previous survey that lending conditions are severe.
SAMA’s (Saudi Arabian Monetary Agency’s) five-time reduction of interest rates since October has led to interbank rates being slashed by more than two-thirds. Hence, expectations amongst businesses have changed. In contrast to 29 percent in Q3, 71 percent of respondents anticipate that the interest rate will stay the same, while none expect them to rise and 29 percent anticipate a fall of between 25 and 100 basis points.
Investment
There seems to be a natural instinct for quality and safety in Saudi Arabia. As we noted in our previous index report, cash and deposits seem to be the preferred investment option for businesses at the moment, while real estate and local equities are not in favor. Some 81 percent of respondents show a preference for cash and deposits against 32 percent in Q4, only 12 percent prefer bonds and just 7 percent have a preference for local equities (against 50 percent in Q3).
It is no surprise that preferences have changed as the global economic landscape continues to worsen and local equities are ailing.
(John Sfakianakis is chief economist at SABB (Saudi British Bank.)