The 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 second quarter.

The composite index for the non-hydrocarbon sector stands at 52 in Q2 2012, just two points lower compared to the index score in the first quarter of 2012, according to the report.

It added:

There was a significant setback to global economic activity during the second half of 2011 due to intensifying stresses in the Euro zone coupled with a general slowdown in many of the world’s key economies.

As a result, in January 2012, the IMF cut the forecast for 2012 global economic growth to 3.3 percent from its September forecast of 4 percent. However, stronger than expected economic data released in some countries during the first quarter of 2012 has led to a slightly improved outlook for the second half of the current year.

The continued recovery in the US, supported by the improving manufacturing sector and job market as well as household spending, and growth in China along with other emerging economies will drive the global economy in 2012.

In the US, GDP growth accelerated sharply during Q4 2011, reaching an annualized rate of 3 percent, up from 1.8 percent during the previous three months. Lower cutbacks in state and local government spending, increased consumer spending driven by job creation and wage growth, strong non-residential investment, and buoyant exports should continue to support growth in the world’s largest economy.

In Europe, there has been some stabilization in the performances of financial markets and the region’s economies.

The European Central Bank has decided to grant banks unlimited three-year loans at a very low interest rate of just 1 percent, which will remove some pressure from the banking sector and the risk of a systemic panic in global financial markets. Growth in the emerging markets will be underpinned by strong infrastructure investment, a soft landing in China rather than an abrupt deceleration in activity and favorable terms of trade for commodity exporters.

The Japanese economy is expected to do better this year compared to 2011, being supported by normalization of manufacturing production and an increase in pace in post-quake reconstruction investment.

One of the the key risks to the improving global economic recovery is high oil prices.

The rise in the price of crude oil poses a growing threat to many income constrained consumers and businesses around the world, and a risk to many emerging nations battling domestic inflation.

Crude oil prices started to rise in the second half of 2011 as supply concerns arising out of disruptions in Libya and some other oil producing African nations began to dominate investor sentiment despite indications of slowing growth.

In January 2012, the average monthly OPEC basket climbed to $ 111.76 per barrel, supported by positive economic data from the US and escalating geopolitical tensions in the Middle East.

While a rather weaker Dollar vis-à-vis the Euro also provided support, uncertainties stemming from the sovereign debt crisis in Europe kept a lid on crude prices. The OPEC basket climbed further in February and averaged $ 117.48 per barrel. Besides the above factors, positive developments in the Greek financial bailout were also supportive of crude prices. In March, the average price of the OPEC basket was $ 123.03 per barrel, as geo-political tensions continued to maintain a risk premium.

The impact of the increase in international sanctions against Iran as a result of its stance over the nuclear issue will ensure that oil prices remain high throughout 2012. As a result, business activity in Saudi Arabia’s hydrocarbon industry will remain strong on account of robust oil prices as well as increase in output.

The KSA BOI survey reveals that Saudi Arabia’s hydrocarbon sector optimism has improved in Q2 2012. The overall BOI composite score for the sector is 43, 3 points higher than the score in Q1 2012, due to higher BOI scores for all three parameters. With respect to the Level of Selling Prices parameter, 53 percent of the respondents expect prices to rise further and 37 percent anticipate that prices will remain unchanged in Q2. 10 percent of the respondents anticipate a drop in prices in Q2 2012. The majority of respondents expect prices to increase as geopolitical tensions with respect to Iran’s nuclear program continue to dominate sentiment in the crude market. The BOI score for Level of Selling Prices is at 43 in Q2 2012, compared to 40 in the previous quarter. Consequently, the Net Profits expectations of the industry players have also brightened in the current quarter, the BOI for which is recorded at 38 points, compared to 33 in the last quarter.

The BOI for Number of Employees has increased to 47 points in Q2 2012 from 45 in the first quarter of 2012, which again reflects the overall gain in expectations.

Saudi business sentiments in Q2 remain steady with respect to the previous quarter. The composite index for the non-hydrocarbon sector stands at 52 in Q2 2012, just two points lower compared to the index score in the first quarter of 2012. The Saudi economy’s growth will continue to be driven by public sector spending and increased bank lending. One of the fastest growing sectors is expected to be construction, the main beneficiary of government spending. Also, related sectors such as suppliers of raw materials and services will also gain from the high level of government spending. Public spending is seen as the key driver of non-oil economic growth in the current year to counteract the dampening impact of factors external to the Saudi economy such as geo-political tensions in the MENA region and the debt situation in Europe. Recession in Europe will not only impact oil demand and oil prices, but will also hurt the Kingdom’s non-oil exports to the continent. Growth in 2012 is expected to be lower than in 2011 due to a weaker global economy and lower oil output. Saudi Arabia recorded a real growth rate of 6.77 percent in 2011. The manufacturing sector recorded one of the strongest growths among all sectors at 12.37 percent, followed by the construction sector at 11.62 percent, according to the Central Department of Statistics & Information.

The BOI survey reveals a steady composite index, as businesses and consumers remain assured by the government’s commitment to support the economy despite a weak global environment. All six parameters show a sideways movement in their index values for Q2 2012, with marginal increases or decreases. The BOI for the Volume of Sales parameter has registered a value of 67 compared to 66 in Q1 2012, while the BOI for the New Orders parameter is recorded at 65 compared to 67 in Q1. The BOI for Level of Selling Prices stands at 24 in Q2 2012, compared to 27 in the last quarter. The inflation rate in Saudi Arabia was recorded at 5.4 percent in February 2012. There is expectation of a relative stability or a slight decline in the inflationary pressures in the coming period due to a decline in the world food prices, and relative stability in the domestic market.

Profitability and hiring expectations have also changed marginally relative to the previous quarter. The BOI for the Net Profits parameter is recorded at 54 in Q2 2012, down from 59 points in the first quarter of 2012. The BOI for Number of Employees remains steady, dropping marginally by two points from 50 in the last quarter. Respondents are slightly less optimistic with respect to inventories compared to Q1 2012; the BOI for Level of Stock stands at 33 in Q2 2012, down from 39 points in the previous quarter.

Among the various sectors surveyed, the trade & hospitality sector has gained a single point in its composite index value, while the transport & communications sector has the same score as in Q1. The other three sectors display minor drops in composite index scores.

Outlook regarding factors likely to adversely influence operations in Q2 2012 reflects that business conditions will remain firm. 33 percent of the respondents do not anticipate any negative factors coming into play in the second quarter of 2012; this number has increased from 31 percent in the previous quarter. Saudi businesses continue to cite shortage of skilled labor as a leading factor that could impact operations during Q2 2012. 14 percent expect that availability of finance might impact business operations in Q2 2012. 9 percent of the businesses are concerned about inflationary factors in the short term.

40 percent of the firms plan to invest in business expansion in Q2 2012 compared to 60 percent in the previous quarter.


The JPMorgan Global Manufacturing PMI was marginally lower at 51.1 in March, down from 51.2 in February. Growth in the US continued to accelerate, but this was offset by contractions in the Euro zone and China. The rate of output expansion in India slowed sharply. Industrial nations like Japan, UK, South Korea, Brazil and Russia, saw faster growth in March than in February. Manufacturing employment rose for the twenty-eighth consecutive month in March. Job creation was recorded in the US, India, Brazil, Taiwan, South Korea, Canada and Turkey.

Results from the BOI Survey suggest that the manufacturing sector outlook has remained steady in the second quarter of 2012. The composite index for the manufacturing sector stands at 54 in Q2 2012, a single point lower than the index value in the first quarter.

The demand outlook for this sector shows that while the BOI for Volume of Sales has gone up by 2 points to 72, the BOI for New Orders on the other hand has gone down by 2 points to 68 in Q2.

Respondents in the manufacturing sector anticipate stronger prices in Q2. The BOI for Level of Selling Prices is 6 points higher in Q2 2012 at 32. Stable demand expectations but higher price expectations have however resulted in a weaker outlook for profitability. The BOI for Net Profits has gone down to 52 in Q2 from 59 points in the previous quarter. The BOI for Number of Employees is almost steady, dropping marginally by 3 points to 47 in Q2 from 50 in Q1 2012, while the Level of Stock parameter is much weaker at 29 in Q2 compared to 40 in Q1.

26 percent of the firms in the manufacturing sector do not expect business operations to get impacted by adverse factors in Q2 2012 compared to 40 percent in Q1. Availability of skilled labor is a key concern for 28 percent of the firms. Other factors anticipated to hurt business operations include competition from imports and local products, market volatility, and the price and availability of raw materials.

42 percent of the respondents plan to invest in business expansion in Q2 2012, compared to 60 percent in the previous quarter.

The global construction sector is a lagging reflection of the world’s economic health and hence faces a long and slow recovery, especially in developed countries. Growth for construction depends on expected long-term growth for the economy. The emerging economies have been leading the growth in global construction spending over the past few years. Oil exporting countries will continue to benefit on account of robust oil prices, as increased public spending in these countries will greatly benefit construction spending. On the other hand, China’s property sector has witnessed a large drop in residential construction last year and could pull down construction growth in the country.

Optimism levels in Saudi Arabia’s construction sector remain firm at the previous quarter’s level. Construction is forecast to be the fastest growing sector in 2012 since it is the leading beneficiary of government spending. The optimism index probably does not reflect this since there has been relatively little physical progress in the government’s plan to build new housing due to the initial work involved in sourcing land and designing the properties and associated infrastructure. The composite index for this sector stands at 57 in Q2 2012; just 2 points lower than the score of 59 in Q1. The demand outlook for this sector is almost unchanged in comparison with the last quarter. The BOI for Volume of Sales remains at 73 in Q2, while the BOI for the New Orders parameter is at 64, a marginal 2 points lower than the score of 66 in Q1 2012. The BOI for Level of Selling Prices is higher by 4 points at 26 in the current quarter.

Even though demand and price expectations have moved sideways, profitability outlook has been dented; the BOI for Net Profits stands at 54 in Q2 2012 compared to 71 in Q1. On the other hand, the hiring outlook has ticked up; the BOI for Number of Employees is at 67, 4 points higher than the score of 63 in Q1. The Level of Stock BOI has registered a score of 35 in Q2 compared to 37 in the previous quarter.

Shortage of skilled labor and availability of finance have been the key concerns for construction firms for the past few quarters. 29 percent and 17 percent of the respondents respectively have cited these as major factors likely to impact their business in Q2 2012. However, 37 percent of the respondents do not expect any negative factors hurting business operations as opposed to 23 percent in the previous quarter. Inflation is a concern for 11 percent of the respondents.

36 percent of the firms plan to invest in business expansion as opposed to 53 percent in the previous quarter.

Like every other industry, retail must do business against the backdrop of a fragile global economy. In most developed countries, consumer sentiment has been mediocre at best amidst high unemployment rates and government fiscal austerity. 2012 will be challenging for retailers, but no more so than what most companies have faced since the 2008 financial crisis. In the current year, retail businesses will continue to enter new markets such as the Asia Pacific region, Africa and South America as higher growth in these regions continues. They will not only look for new markets but also look to innovate in these markets. Retail sales in the US increased 1.1 percent in February, which was the highest rate in five months, reflecting an improving labor market. On the other hand retail sales in the UK fell 0.8 percent in February and 1.1 percent in Germany. Japan’s retail sales increased 3.5 percent in February, indicating that consumer confidence is returning as reconstruction demand boosts the economy. Saudi Arabia’s retail sector has benefited from the trickle down effects of government spending as well as the introduction of unemployment benefit and higher public-sector minimum wage.

According to the BOI survey, the retail sector in Saudi Arabia continues to display strong expectations. At 50 in Q2 2012, the composite index remains steady compared to the value of 49 in Q1.

Respondents anticipate higher growth in demand in Q2 2012 but lower prices compared to the previous quarter. The BOI for Volume of Sales stands at 70, up from 61 in Q1, while the BOI for New Orders shows a modest uptick of one point to 64. The BOI for the Level of Selling Prices parameter is at 23 in Q2 2012, down from 28 in Q1 2012. Corresponding to higher demand expectations, profitability expectations are also higher; the BOI is recorded at 56, up from 50 in the previous quarter. Despite stronger demand and profitability expectations, the BOI for Number of Employees has dropped to 39 in Q2 compared to 41 in Q1. The BOI for Level of Stock has decreased by 3 points to stand at 37 in Q2 2012.

As in the other sectors of the economy, shortage of skilled labor and availability of finance are likely to impact business operations in the trade and hospitality sector. Thirty-three percent of the respondents anticipate that shortage of skilled labor will be a key concern for their businesses in Q2 2012. Availability of finance will be a worry for 16 percent of the firms.

28 percent of the respondents do not anticipate any negative factors to adversely impact business operations in Q2.

Forty-five percent of the firms plan to invest in business expansion during Q2 2012, down from 70 percent in Q1; while 30 percent do not have any expansion plans.

Stagnating economic activity during the second half of 2011 is reflected in freight data collected by the International Transport Forum. Total external trade by sea has stagnated below pre-crisis levels both in the United States and EU-27, while the decline in air cargo continues and volumes are now slightly above pre-crisis levels for the US and EU. Growth has been led by emerging economies, which is reflected in figures showing exports to Asia, and more specifically China, by sea continued to increase in the EU-27 and the US. Weakness in growth in advanced economies is reflected in imports by sea to the USA and EU-27, which have remained below their pre-crisis levels. Growth in Saudi’s transport sector should remain healthy due to rising import volumes and the need to move large amounts of construction materials.

The BOI survey reveals a steady outlook for firms in this sector. The composite index has posted a score of 47 points in the second quarter of 2012, the same as in the previous quarter. Demand expectations are also stable: the BOI for the Volume of Sales parameter remains at 60 in Q2 2012, while the BOI for New Orders has decreased by 2 points to 60. Industry players’ outlook regarding their Level of Selling Prices has gone down again; the BOI for the parameter stands at 16, down from 27 in the previous quarter. Profitability expectations are slightly higher; the BOI stands at 52 in Q2 2012, up by 5 points from the previous quarter’s figure. Hiring plans remain solid in the second quarter; the BOI stands at 45, compared to 41 in the first quarter of 2012.

As in the previous quarter, shortage of skilled labor remains the leading cause for concern for this sector, with 23 percent of the respondents expecting it to impact their business. Availability of finance is the second most important concern for this sector; 14 percent of the respondents expect it to be a business concern in Q2 2012.

However, 37 percent of the firms do not expect any negative factors to affect their operations in Q2 2012.

34 percent of the respondents in this sector plan to invest in business expansion during the second quarter of 2012 as opposed to 53 percent in Q1, while 30 percent will not invest in expansion.

While risks to global financial stability had increased during the last quarter of 2011, the pessimism has been reversed in the past couple of months. Most equity markets around the globe have rebounded from their recent lows. The generally upbeat stock market performances reflect investor confidence which has resulted from steady recovery in the US, the Greek bailout plans and the European Central Bank’s three-year bank loans, which have helped remedy the solvency issues of the embattled financial institutions, and enabled them to resume purchasing the region’s sovereign debt. In Saudi Arabia, growth in the financial sector will pick up but it will be sluggish as investors remain cautious.

The JPMorgan Global Services Business Activity Index registered a score of 55.2 in March, down from February’s score of 56.3. March PMI data pointed to ongoing growth of both business activity and incoming new work, with rates of expansion only slightly below February’s one-year peaks.

Respondents in Saudi Arabia’s financial and business services sector expect some moderation in the second quarter in 2012, with lower expectations than in the previous quarter. The composite BOI score for this sector is at 49, decreasing 6 points from the previous quarter score. Expectations with respect to future demand levels have moderated compared to Q1 2012, with the BOI for Volume of Sales registering a decrease of 2 points, while the BOI for New Orders has dropped by 3 points to 64. The Level of Selling Prices outlook has also inched lower; the BOI score for this parameter has dropped by 5 points to 22. Profitability expectations of the industry players have weakened. The BOI for Net Profits has decreased by 11 points to 53 in the second quarter of 2012. Hiring outlook has shown a corresponding moderation; the BOI for Number of Employees is recorded at 44, down from 53 in the last quarter.

40 percent of the respondents in this sector do not anticipate that any negative factors will influence their business operations in the second quarter of 2012 compared to 34 percent last quarter. 27 percent anticipate shortages in the availability of skilled labor while 15 percent are concerned about availability of finance.

39 percent of the respondents in this sector say that they will invest in business expansion during Q2 2012, compared to 61 percent in the first quarter of 2011.


The business environment in Saudi Arabia remains supportive.

33 percent of the respondents in the non-hydrocarbon sector have said that they do not expect any negative factors to influence their business operations in the second quarter of 2012 compared to 31 percent in the first quarter of 2012. Shortage of skilled labor is the most important concern for the respondents, with 28 percent citing it accordingly. Availability of finance will prove to be a worry for 14 percent of the respondents, while inflationary pressures will impact 9 percent of the businesses.

In the oil and gas segment, 27 percent of firms do not anticipate adverse factors to impact business operations. Shortage of skilled labor is the leading concern for this sector.

Business expansion plans have weakened in Q2 2012 compared to a quarter ago. Forty percent percent of the non-hydrocarbon companies have said that they would invest in business expansion in Q2 2012. The number has decreased from 60 percent in Q1 2012.