Expectations that oil prices will remain favorable and signs that a moderate recovery is taking hold in many global economies are leading most business executives in the largest Arab economy to anticipate financial indicators will swing in a positive direction over the next two quarters. The findings of the Q1, 2010 BSF Business Confidence Index come in line with our view that an economic recovery in the kingdom is likely to follow a gradual and measured course this year, with more improvements likely to take place in the second half of the year than in the first. While sentiment is upbeat, the major hurdle standing before a full recovery in the Saudi economy is the bank lending situation, which business leaders polled believe has failed to improve in a marked way. A majority of the 824 companies surveyed are frustrated by the lack of availability of bank credit; 59 percent of executives said the lending attitude of financial institutions falls short of their expectations, down only slightly from 61.8 percent in Q4. For comparison reasons and to establish a base line, a survey was carried out during November and was not published.
Overall business confidence notched up to 99.4 points in Q1, compared with 98.2 points in Q4 2009. A base value of 100 represents Q3, 2009. Respondents of the survey, conducted between Jan. 15-23, 2010, expressed the following perspectives about the general economic climate and how they expect it will bear on the performance of key business indicators:
• An overwhelming 89.9 percent of respondents expect the Saudi economy would be in “better” or “much better” condition in the next two quarters, with half expressing the latter forecast. This is up from 76 percent of respondents expressing the same view in Q4. None of the respondents in the survey anticipate the economic outlook would worsen.
• More than two thirds of company executives conveyed confidence that their organization’s financial performance was set to improve in the next two quarters. A sizeable 69 percent of businesses assume their companies’ financial performance would be stronger, up from 53.7 percent in Q4. Another 30.7 percent foresee steady performance in the next six months, while none of the executives expect their financial performance would weaken over the period.
• A full 69.3 percent of respondents expect company revenues will grow in the coming two quarters, while 52.3 percent of business executives are anticipating sales will rise. Still, a good proportion of businesses remain cautious about their corporate prospects, with 30.7 percent of executives estimating revenues could fall in the next six months, up from 25 percent in the last survey. Just over a third (34.4 percent) believe sales will dip over next the two quarters.
Oil prices
Businesses assume the oil price environment will remain favorable for the next two quarters. The price of oil is a significant confidence indicator as to the health of the Saudi economy since Saudi Arabia, the world’s most influential oil producer, derives almost 90 percent of state revenues from exports of oil. Demand for and prices of oil also have significant implications for the nonoil sector, particularly petrochemical exports.
A slight majority of respondents, 52.9 percent, expect oil prices would rise above $85 a barrel during the forecast period. Oil prices have hovered around $75 for a few months now, bolstering the investment case for oil producers like the Kingdom, which has cited this as a fair price that enables it to keep investing in capacity-boosting hydrocarbon projects while building up infrastructure to cater to its growing population.
However, not all business leaders shared the same optimism in their outlook for energy markets; a substantial 47.1 percent anticipate oil prices will fall below $75 a barrel, including a third who anticipate the price of crude could trip below $70. As with most questions in the survey, however, respondents were not overly bearish. None of the respondents saw oil prices falling below $65 a barrel — a level we regard as high enough to allow Gulf energy exporters, including Saudi Arabia, to balance their fiscal budgets.
While businesses assume a pick up in consumer demand is likely to take hold in 2010, they are waiting for hard evidence before they start to rethink their business plans, the survey showed. Some 44.5 percent of business executives (against 33.7 percent in Q4) are not planning to change prices for their products or services in the next two quarters, preferring to keep prices steady as they test demand appetite. Still, just over a third of Saudi businesses said they expected to raise prices in the next two quarters (against 35.9 percent in Q4), while 9 percent plan to lower prices (up from 8.2 percent in Q4). Many companies are also still wary about building up inventories too substantially following the slowdown in 2009. Imports to Saudi Arabia fell by more than a fifth last year as companies adjusted to a slowdown in demand that accompanied the global financial crisis. The survey showed businesses haven’t shifted their perspective much since in Q4.
Asked about what they planned to do with inventories in the coming two quarters, 37.5 percent of businesses said they would replenish them such that they remain at current levels. Just over a third of respondents (33.7 percent) plan to boost inventories over the same period, while another 29 percent expect inventories to fall.
Most companies would either keep production capacity the same or raise it in the coming two quarters, according to the survey. Some 38 percent said they would raise capacity and 41.6 percent said they would keep it steady. A fifth of respondents expect to reduce production capacity.
In view of their cautiously optimistic stance, companies remain vigilant about their hiring plans, the survey showed. While none of the executives surveyed planned to lay off any of their staff in the next two quarters, 47.8 percent of respondents said they would maintain a freeze on hiring, down from 53.3 percent in the Q4 survey. Job seekers can also take comfort in the growing number of companies that are planning to recruit employees in the next two quarters; some 38.7 percent expect to boost hiring over the period, up from 29.8 percent in the last survey.
A pick up in the pace of bank credit is a precondition to an economic revival, particularly for the private sector. The other precondition is the private sector’s expansion appetite. The overwhelming sentiment of businesses is that banks have not been able to deliver so far. A major 58.6 percent of business leaders said the lending attitude of financial institutions fell below their expectations. This marks a slight improvement from 61.8 percent in Q4, although it underpins the continued mismatch between the general economic outlook and the level of bank risk aversion.
The Saudi Arabian Monetary Agency (SAMA) has taken steps to strive to stimulate bank credit, particularly by slashing interest rates on deposits and lowering bank reserve requirements. SAMA took the necessary steps within its regulatory mandate, but the moves had little bearing on boosting credit expansion; bank claims on the public and private sectors fell almost 5% last year (latest data).
Most respondents — 58.9 percent — do not foresee any change in interest rates in the next two quarters as the central bank seeks to sustain an environment where banks are encouraged to lend once risk appetite improves. SAMA stated earlier in January that there was no plan to raise interest rates since inflationary pressures were not concerning and demand for loans was not strong enough. Last year, SAMA reduced the benchmark repurchase rate to 2 percent and the reverse repurchase rate to 0.25 percent.
In Q4, businesses had greater expectations for interest rates to change, with only 26.5 percent of respondents at the time thinking rates would remain steady.
BSF anticipates banks will loosen up on their attitude toward lending, particularly in the second half of the year, both because of a measured increase in private sector demand for credit to finance expansion projects as well as the need to improve profits which sagged during 2009, in a low interest rate environment. Through to November, cumulative Saudi bank profits were down 9.6 percent from the year earlier. According to BSF forecasts, loans to the private sector should grow 8 percent in 2010, up from 2.1 percent in 2009.
(John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh)
