RIYADH: It seems a general upbeat mood is slowly unfolding in Saudi Arabia’s economy.
As we have argued before, Saudi Arabia is not isolated from the global economic recession and neither are businesses in the Kingdom. But as there is some optimism in the global economy, businesses in Saudi Arabia are now reflecting this upturn.
Time will test this cautiously optimistic view, but businesses now expect the downturn in the economy to decelerate — which is reflected in SABB’s Q2 survey, revealing that business confidence in Saudi Arabia is weakening at a slower pace.
Against the backdrop of some optimistic global economic data, we would expect Saudi businesses to anticipate some improvement in conditions.
Some 51 percent of businesses expect growth in their organizations, compared to 42 percent in our previous survey. Overall, the business environment is clearly showing signs of cautious optimism.
Very few are expecting business growth to get weaker (9 percent), which is in line with what we have been saying for some time now: That general conditions will not progressively weaken.
The survey was conducted in May, a month which witnessed a host of positive news abroad and cautiously optimistic sentiments at home.
From our survey of 951 companies (previously 765) across diverse industry sectors, 51 percent of respondents expect business growth over the next two quarters — a significant improvement over our previous survey, but way below the 89 percent in Q3 2008 — nearly 43 percent of respondents expect a rise in production capacity, against a 24 percent in Q1 (getting closer to the 53 percent of Q4 2008).
Going forward, no respondents are anticipating a fall in production, in contrast to the 18 percent who expected production capacity to fall in the previous survey.
Fifty-seven percent expect production capacity to remain the same, but this figure could swing as conditions become more positively ingrained
The impact of the global recession seems to worry fewer businesses in the Kingdom now. As the perception grows that some economies around the world are bottoming-out, the reaction in Saudi Arabia will reflect that positive sentiment. As such, the SABB Index figure continues to decline, but at a more measured pace.
SABB’s latest findings reveal that business confidence is down to 88.3 (from 89.2) — a 1.1 percent decline, compared to a 7.4 percent in Q1.
At the time of this survey, oil prices had reached around $60 per barrel. The majority of those surveyed (52 percent) expect prices to stay in the $50s range, while only 15 percent expect them to rise above $60s, with 15 percent predicting the $40-$50 range and 18 percent expecting prices to fall under $40.
Businesses expect inflation to fall further, which is helping increase confidence in the overall economy. Most respondents, 47 percent (against 39 percent in Q1), stated that prices will be kept the same, followed by 34 percent (against 35 percent in Q1) who are considering lowering prices. Just 5 percent are not sure, while 14 percent (against 12 percent in Q1) are considering increasing prices.
There is little excitement on the currency front for speculators, but that’s good news for business predictability. It’s no surprise that most businesses find currency far less of an issue than growth and credit. With 94 percent of respondents not expecting the riyal to be revalued and only 3 percent of respondents expecting a change in the next two quarters (and 3 percent not sure), we ascertain that the revaluation debate is of little concern to the business community.
We felt it would be pertinent to ask again how businesses view the prospect of a GCC currency union over the next six years. Most of the respondents (67 percent) say they do expect the union to take place within that time.
The survey shows that rising real estate prices (in terms of commercial office space) seem not to pose a worry for companies across the Kingdom. We have witnessed a substantial shift in expectations, as only 10 percent of respondents (7 percent in Q1, 46 percent in Q4, 68 percent in Q3) say they anticipate the cost of real estate will rise, which results in a positive impact on businesses in the next two quarters. Some 49 percent (against 50 percent in Q1) expect real estate prices will fall in the next two quarters. And 30 percent of respondents (against 38 percent in Q1) expect real estate prices to remain the same, with the rest not sure.
The availability of human resources is an added concern for businesses, as labor supply constraints can limit expansion in the non-oil private sector — although it’s evident that there is no particular shortage in skilled manpower. If businesses want to hire skilled workers, it seems from the anecdotal evidence that there is a preference for hiring from other parts of the GCC (Gulf Cooperation Council).
Among our survey respondents, only 11 percent report that their organizations do not have all the required staff and just 6 percent expect to be “very insufficiently” staffed in the next few quarters. Overall, employers seem to be improving on the labor supply front, as 75 percent regard their companies as adequately staffed.
Again, we asked the sensitive question about labor market hiring trends. We are not surprised that 70 percent of respondents (against 74 percent in Q1) expect to institute a hiring freeze during the next two quarters.
Lending appetite continues to wind down as banks increase their liquidity. We note that businesses are still not optimistic about the lending attitude of banks in the Kingdom. It seems that the liquidity measures taken by SAMA have not unlocked additional liquidity for the private sector — a trend which has persisted since Q4 2008.
Thirty percent of respondents expect bank lending to be “accommodating” this quarter, with again no-one responding “highly positive,” just as in previous quarters. Some 22 percent of those surveyed responded that conditions will be “not so severe,” which is significantly different from the 32 percent reported in the previous quarter. However, the big change comes with our last question — and brings little hope for improvement. In what is a substantial rise, some 48 percent believe that bank lending conditions will be “severe.”
It seems that the business community has changed its investment outlook within a short period of time, as the local equity market has rallied over the course of a few weeks.
(John Sfakianakis is chief economist at SABB, Riyadh.)