A considerable shift from the first quarter index, almost 60 percent of the 781 company managers surveyed said the lending attitude of banks had returned to normal or improved, compared with 41 percent who gave the same response last quarter. Languishing bank credit growth has been a key thorn in the side of the economic recovery, compelling the government to take on the primary role in financing numerous expansion projects.

Banks, which have adopted greater prudence in new loan extensions, appear to be turning the page on the slowdown that spread across business sectors last year, the survey showed. Of the polled business leaders, 41.5 percent of respondents described banks' lending attitude as "not good", down from the 58.6 percent who said bank lending fell short of their expectations in the first quarter.

With oil prices averaging above $80 a barrel since the beginning of March, macro-economic fundamentals for Saudi Arabia, the largest OPEC oil exporter and swing producer, are also perceived as robust. All respondents said they expected an enhancement in the country's economic performance over the next two quarters, including 74.5 percent who said they expected "much better" performance.

Overall business confidence rose to 100.7 points in the second quarter from 99.4 points in the first quarter. By rising above the base value of 100, which represents the third quarter of 2009, index results indicate that confidence levels are rising. Respondents to the survey, conducted between March 27-April 7, 2010, also expressed the following views about their business and investment preferences:

• An overwhelming majority of company executives are confident that their organization's sales will improve in the next two quarters. A robust 88.6 percent of businesses assume revenues will rise, up from 69.3 percent in the first quarter. Only 5 percent of businesses, meanwhile, foresee sales declining in the forecast period, down from almost a third in the first quarter.

Fewer businesses expect to raise prices for their goods and services in the coming six months, with 28.7 percent indicating they would raise prices, down from 33.9 percent in Q1. The biggest proportion of respondents - 44.9 percent - said they would keep prices the same, while 16.8 percent plan to lower them.

Company leaders are favoring equity investments much more than they were in the first quarter, with 41.7 percent of respondents saying they expect the stock market would turn positive in the next two quarters, up from 22.7 percent who expressed the same view in Q1. Equities was cited by 41 percent of business leaders as the most-appealing investment prospect, just behind real estate, up from 21 percent in Q1.
 

Businesses expect oil prices will mostly hold their value in the next two quarters, bearing positively on Saudi Arabia, which derives almost 90 percent of state revenues from the export of oil. Higher oil prices tend to boost confidence in Saudi Arabia's nonoil sectors as well, while providing ammunition to continue fueling expansionary state spending. Among the Kingdom's most-important nonoil sectors is petrochemicals, which also closely tracks trends in the global economy.

A majority of respondents, 61.2 percent, expect oil prices will range between $75-$80 a barrel during the forecast period. That price range has widely been cited as a "fair" price encouraging oil producers to invest in building oil and gas production capacity, while also keeping prices at reasonable levels for consuming nations struggling to put the recession behind them. In the first quarter, survey respondents had said they expected oil prices to rise above $85 a barrel, which happened in early April for the first time in 18 months.

In the Q2 survey, just over a fifth (22 percent) of business leaders said they thought oil prices would range $80-$85 a barrel in the next six months, while 16.8 percent assume crude costs could come down below $70, although remain above $65.

Against the backdrop of firm oil prices, macro-economic conditions on the ground are looking up, business leaders said. All respondents foresee improvements in the Saudi economy over the next two quarters - up from 76 percent who held the view at the end of last year. The vast majority expect economic conditions will be "much better" in the forecast period and 25.5 percent said circumstances would be "better".
 
Production hikes, hiring

Encouraged by the broad pick up in the economy, businesses are beginning to abandon the reticence they exhibited in the past year, although they are still wary. This conforms with our view that economic growth should accelerate to 3.9 percent this year from 0.2 percent in 2009, including non-oil sector expansion of 3.7 percent.

To meet growing consumer and industrial demand, businesses are looking to boost production, the survey showed. Most business leaders - 51.6 percent - expect to raise production capacity in the next two quarters, against 38.2 percent who replied the same in the first quarter and 31 percent in the fourth quarter. But a good number of companies are still wary - 37.6 percent are keeping production levels steady and 10.8 percent plan to reduce them.

Asked about what they planned to do with inventories in the coming two quarters, 49.8 percent of businesses said they would boost inventories (against 33.7 percent in Q1), while a fewer number, 22.2 percent, expect inventories to fall. Still, a firm 28 percent of businesses (against 37.5 percent in Q1) said they would replenish inventories such that they remain at current levels over the period, reflecting the continued caution that prevails in the business community.

Almost two-thirds (62.4 percent) of business leaders foresee stronger financial growth for their companies in the next six months, down slightly from 69 percent in Q1. A greater number of respondents said they expected growth to stay the same (37.6 percent in Q2 versus 30.7 percent in Q1). While revenues are overwhelmingly expected to rise, with 88.6 percent of respondents expecting better revenue in the forecast period (against 69.3 percent in Q1), companies are reluctant to raise prices as they continue to test consumer demand.

A greater number of respondents said they would lower prices in the next six months, although the biggest proportion 44.9 percent expect to keep prices steady (against 44.5 percent in Q1). The ratio of business executives who expect to lower prices rose to 16.8 percent in Q2 from 9 percent in Q1. Fewer businesses, meanwhile, expect to raise prices, with 28.7 percent of business leaders saying they could increase rates for their goods and services, compared with more than a third giving the same response last quarter.

There has been a notable shift in the attitude of companies toward recruitment, with most companies abandoning the hiring freezes they had put in place for most of 2009. Only 10 percent of respondents said they would retain a freeze on hiring in the next six months, down from 47.8 percent in the first quarter and more than 53 percent in the fourth quarter. Now, 61.2 percent of businesses plan to hire in the next six months, almost 60 percent higher than the last survey.
 

In the last survey, the predominant concern expressed by business leaders was the lack of availability of bank credit to enable them to finance expansion plans. Banks adopted extreme caution in 2009 toward new loan extensions due to tight global credit conditions and default concerns stemming from debt troubles of certain business families. Private businesses, meanwhile, took to de-leveraging, opting to pay off debts and/or invest less, which cut into their demand for credit and muted overall loan growth.

According to the current survey, the tables are turning and banks are likely to look more favorably at extending credit to businesses. Asked to describe the lending attitude of financial institutions, 25.4 percent of managers said that it was "excellent" or "very good", up from 17.9 percent with the same view in Q1. A greater proportion of respondents, 33.1 percent, also described the lending attitude as normal (against 23.4 percent in Q1), while still 41.5 percent expressed the view that it was not good, down from the 58.6 percent who gave the same response in Q1.

These findings support our view that bank credit to the private sector will grow 8 percent this year after stagnating in 2009, with most of the loan expansion happening in the second half of the year. The loan growth will result from both a measured rise in private sector demand for credit and banks' desire to improve profitability during a period of low interest rates. There are early signs that loan growth is turning; in February, bank claims on the private sector grew 0.9 percent month on month, the fastest pace in six months.

Still, banks are implementing stricter rules for giving loans, respondents said. A majority of 61 percent said banks had tightened standard requirements for loan approvals by at least a small degree since last year, with 35 percent saying they had done so considerably. Some 18 percent of respondents saw no change in lending requirements applied on businesses and individuals, while 21 percent noticed only slight changes.

Expecting higher credit growth, many business leaders are not ruling out an increase in interest rates in the next two quarters, with 24.7 percent (against 15.9 percent in Q1) expecting rates to rise more than 10 basis points and 13.7 percent (against 10.2 percent in Q1) foreseeing rate hikes of more than 20 basis points. A third of respondents, however, expect rates to stay the same, down from 59 percent in Q1. Last year, the Saudi Arabian Monetary Agency (SAMA) reduced the benchmark repurchase rate to 2 percent and the reverse repurchase rate to 0.25 percent. Survey respondents overwhelmingly expect there will be no change in the fixed exchange rate regime, in line with our perspective.

Inflation rates in Saudi Arabia, meanwhile, are not on the radar screen of business leaders for the immediate future. While 37.5 percent of respondents (against 43.4 percent in Q1) expect inflation rates to accelerate in the next two quarters, a majority of 58 percent assume inflation will either stay at current levels or fall during the period. Rental inflation, a major driver of price rises in recent years, has been easing in the country, although food price inflation due to higher global commodity costs has been picking up pace. Inflation accelerated in February to 4.6 percent from 4.2 percent the month earlier.
 
 

Saudi business leaders are warming up to equity investments once again, having shunned stock markets for much of last year, according to the survey. Asked which single asset class would provide the best returns in the next two quarters, 41.1 percent of business leaders ranked equities above real estate, bonds or holding cash - up from 21 percent in the Q1 survey and just 12.7 percent in the Q4 survey.

Equities still fell behind real estate, which remained the most-attractive investment prospect for business leaders, attracting 42.4 percent of the votes, although property's favor has declined from 59 percent at the end of last year. Real estate has an element of low-risk perception among Saudi businessmen, which explains why investments in property rose in 2009 as individuals opted to stray from high-risk plays.

Some 11.9 percent of respondents (against 26.6 percent in Q1) ranked cash the best medium-term investment opportunity, while 4.6 percent answered bonds (against 5.2 percent in Q1). This is indicative that businesses are becoming less risk averse and willing to invest. The price of land, regarded as a key low-risk investment for Saudis, has continued to fall in the first half of 2010, according to BSF's first real estate survey released this month.

The outlook for equities corresponds with an overwhelming view that the only direction for Saudi shares is up in the next two quarters, the survey showed. Only 7.4 percent of respondents (against 19.7 percent in Q1) expect negative performance of the stock market in the forecast period. The most common response to a question about how equity markets would perform was "positive". Some 41.7 percent of executives gave that answer (against 22.7 percent in Q1), while 34.4 percent expect flat performance (against 15.3 percent in Q1). The Saudi Tadawul All-Share Index has risen more than 12 percent this year.

Among equity sectors, petrochemicals and banks were still listed by businesspeople as their most-preferred, although a good deal of interest has shifted to telecommunications and cement since the first quarter, the survey showed. Some 23.8 percent of businesspeople cited telecommunications as their top pick (against 4.6 percent in Q1), while cement was

favored by 14.3 percent (against 9.8 percent in Q1). Petrochemicals was still the most-preferred sector with 28.6 percent of the votes (against 47.7 percent in Q1) and banking accounted for 27.9 percent (against 34.1 percent in Q1).

The sentiment among companies is that real estate prices are most-probably going to fall or stay the same in the next two quarters, with 31.9 percent espousing the former view (against 23.9 percent in Q1) and 30.3 percent expressing the latter view (against 22.1 percent in Q1). Only 24.7 percent of respondents said real estate prices were likely to rise, down from 43.4 percent in Q1.
 
 

In the last survey, the predominant concern expressed by business leaders was the lack of availability of bank credit to enable them to finance expansion plans. Banks adopted extreme caution in 2009 toward new loan extensions due to tight global credit conditions and default concerns stemming from debt troubles of certain business families. Private businesses, meanwhile, took to deleveraging, opting to pay off debts and/or invest less, which cut into their demand for credit and muted overall loan growth.

According to the current survey, the tables are turning and banks are likely to look more favorably at extending credit to businesses. Asked to describe the lending attitude of financial institutions, 25.4 percent of managers said that it was "excellent" or "very good", up from 17.9 percent with the same view in Q1. A greater proportion of respondents, 33.1 percent, also described the lending attitude as normal (against 23.4 percent in Q1), while still 41.5 percent expressed the view that it was not good, down from the 58.6 percent who gave the same response in Q1.

These findings support our view that bank credit to the private sector will grow 8 percent this year after stagnating in 2009, with most of the loan expansion happening in the second half of the year. The loan growth will result from both a measured rise in private sector demand for credit and banks' desire to improve profitability during a period of low interest rates. There are early signs that loan growth is turning; in February, bank claims on the private sector grew 0.9 percent month on month, the fastest pace in six months.

Still, banks are implementing stricter rules for giving loans, respondents said. A majority of 61 percent said banks had tightened standard requirements for loan approvals by at least a small degree since last year, with 35 percent saying they had done so considerably. Some 18 percent of respondents saw no change in lending requirements applied on businesses and individuals, while 21 percent noticed only slight changes.

Expecting higher credit growth, many business leaders are not ruling out an increase in interest rates in the next two quarters, with 24.7 percent (against 15.9 percent in Q1) expecting rates to rise more than 10 basis points and 13.7 percent (against 10.2 percent in Q1) foreseeing rate hikes of more than 20 basis points. A third of respondents, however, expect rates to stay the same, down from 59 percent in Q1. Last year, the Saudi Arabian Monetary Agency (SAMA) reduced the benchmark repurchase rate to 2 percent and the reverse repurchase rate to 0.25 percent. Survey respondents overwhelmingly expect there will be no change in the fixed exchange rate regime, in line with our perspective.

Inflation rates in Saudi Arabia, meanwhile, are not on the radar screen of business leaders for the immediate future. While 37.5 percent of respondents (against 43.4 percent in Q1) expect inflation rates to accelerate in the next two quarters, a majority of 58 percent assume inflation will either stay at current levels or fall during the period. Rental inflation, a major driver of price rises in recent years, has been easing in the country, although food price inflation due to higher global commodity costs has been picking up pace. Inflation accelerated in February to 4.6 percent from 4.2 percent the month earlier.
 
 

Saudi business leaders are warming up to equity investments once again, having shunned stock markets for much of last year, according to the survey. Asked which single asset class would provide the best returns in the next two quarters, 41.1 percent of business leaders ranked equities above real estate, bonds or holding cash - up from 21 percent in the Q1 survey and just 12.7 percent in the Q4 survey.

Equities still fell behind real estate, which remained the most-attractive investment prospect for business leaders, attracting 42.4 percent of the votes, although property's favor has declined from 59 percent at the end of last year. Real estate has an element of low-risk perception among Saudi businessmen, which explains why investments in property rose in 2009 as individuals opted to stray from high-risk plays.

Some 11.9 percent of respondents (against 26.6 percent in Q1) ranked cash the best medium-term investment opportunity, while 4.6 percent answered bonds (against 5.2 percent in Q1). This is indicative that businesses are becoming less risk averse and willing to invest. The price of land, regarded as a key low-risk investment for Saudis, has continued to fall in the first half of 2010, according to BSF's first real estate survey released this month.

The outlook for equities corresponds with an overwhelming view that the only direction for Saudi shares is up in the next two quarters, the survey showed. Only 7.4 percent of respondents (against 19.7 percent in Q1) expect negative performance of the stock market in the forecast period. The most common response to a question about how equity markets would perform was "positive". Some 41.7 percent of executives gave that answer (against 22.7 percent in Q1), while 34.4 percent expect flat performance (against 15.3 percent in Q1). The Saudi Tadawul All-Share Index has risen more than 12 percent this year.

Among equity sectors, petrochemicals and banks were still listed by businesspeople as their most-preferred, although a good deal of interest has shifted to telecommunications and cement since the first quarter, the survey showed. Some 23.8 percent of businesspeople cited telecommunications as their top pick (against 4.6 percent in Q1), while cement was

favored by 14.3 percent (against 9.8 percent in Q1). Petrochemicals was still the most-preferred sector with 28.6 percent of the votes (against 47.7 percent in Q1) and banking accounted for 27.9 percent (against 34.1 percent in Q1).

The sentiment among companies is that real estate prices are most-probably going to fall or stay the same in the next two quarters, with 31.9 percent espousing the former view (against 23.9 percent in Q1) and 30.3 percent expressing the latter view (against 22.1 percent in Q1). Only 24.7 percent of respondents said real estate prices were likely to rise, down from 43.4 percent in Q1.

Business leaders polled for the Q2 2010 BSF Business Confidence Index reveal that optimism is gaining momentum, with managers slowly abandoning vigilance as they view a pick up in business activity and the wider economy as imminent. The swing in business confidence back above 100 indicates business executives across various sectors are starting to expect greater economic traction, consumption and investment.
 
(John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh.)