Most of the 881 respondents to Banque Saudi Fransi's fourth-quarter (Q4) business confidence survey expect the economy will move further toward recovery over the next two quarters. Company executives have mainly set aside concerns over the euro zone debt crisis that had hurt sentiment in the Q3 survey. They plan to increase production capacity, build inventories and hire new staff, survey results showed.
Evidence that bank credit momentum is building helped lift the overall BSF business confidence index to 100.2 points in Q4 from 99.8 points in Q3. The base value of 100 represents the third quarter of 2009. The survey, conducted quarterly, draws on the perspectives of top managers in finance, real estate and construction, information technology, petrochemicals, tourism, advertising and legal affairs. Respondents to the Q4 survey, conducted Sept. 25 to Oct. 9, brought to light the following themes:
Steady or higher oil price outlooks among businesses underpin confidence that revenues will improve in the next two quarters. A firm 66.2 percent of respondents expect their company's revenues will rise during the period, up from 53.8 percent in the third quarter. This is still vastly below the 88.6 percent who responded the same in Q2, highlighting a continued sense of hesitation. Some 28.6 percent of respondents are still anticipating that sales volumes will hold steady in the next six months, down from 35.8 percent in Q3 and 3.5 percent in Q2.
Business executives are witnessing a gradual improvement in credit markets; some 21 percent of respondents described banks' lending attitude as "not good" in the Q4 survey, far fewer than the 46.5 percent who forecast the same in Q3. The largest proportion of executives, 43.5 percent, expect bank lending will be "normal" over the period, while more than a third thought it would be very good or excellent.
Investors are more comfortable taking risks with their surplus cash than they were in Q3. The ratio of business leaders who described cash holdings as the best medium- term investment prospect fell sharply to 9.3 percent in Q4 from nearly half of respondents in Q3. Equities gained favor with 43.9 percent of the votes, followed by real estate, bonds and cash. This is backed by perceptions of improved real estate prices and more positive performance in shares.
An average oil price of more than $76 a barrel in Q3, in addition to continued stronger demand from clients in Asia, has sharply changed the energy outlook espoused by Saudi businesspeople in the Q4 survey.
In the last survey, more than a third of respondents thought oil prices would fall below $65 a barrel in the following months and the vast majority expected prices would fail to rise above $75. Contrary to expectations, however, not once in Q3 did prices fall below $70, a fact that has emboldened executives' oil market outlook. Only 2 percent of respondents (against 35 percent in Q3) expect crude prices will drop below a floor of $65 in the coming two quarters, with 75 percent assuming prices will range between $75 and $85 a barrel.
This is promising for the state's fiscal revenues, more than 85 percent of which are derived from oil exports, and should enable the Kingdom to sustain foreign asset holdings at about 100 percent of GDP while supporting an expansionary spending program. Net foreign assets held by the Saudi Arabian Monetary Agency (SAMA) are 10-fold the level they were in 2002.
Resilient oil prices have heightened the expected pace of recovery of the Saudi economy. An overwhelming 90.4 percent of respondents said they expected "better" or "much better" macro-economic performance in the next six months, up from 69.7 percent who said the same in Q3. While the answers were still weaker than Q2, they support expectations of a turnaround in economic growth. We expect GDP growth will rise to 3.8 percent this year and 4.2 percent in 2011, from 0.6 percent in 2009. The number of respondents anticipating an economic status quo dropped to 9.6 percent from almost a third in the last survey.
Hand-in-hand with a revival in domestic demand and output is the acceleration of inflation, which topped 6.1 percent in August and slightly dropped in September to 5.9 percent, the highest rates in the Gulf region. Expectations for steeper rates of inflation have steadily risen in the past three quarters. A majority of business leaders (57 percent) predict the inflation rate will rise in the next six months (against 49.3 percent in Q3 and 37.5 percent in Q2), while 14.5 percent said they thought inflation would stay at the same level.
A decent ratio of managers, meanwhile, foresee downward pressure on prices in the coming months, with 28.5 percent saying they expect inflation to fall (against 34.4 percent in Q3). Driven by steep food prices and rents, and escalating goods and services costs, inflation in the Kingdom has few easy fixes using monetary policy. Money supply is still relatively low to contribute to inflationary pressures. None of the respondents expect a change in the dollar-pegged currency regime policy in the next six months, while a majority of 55.5 percent project interest rates on loans will remain steady (against 31.3 percent in Q3).
Sales & hiring
The survey corroborates anecdotal evidence of a pickup in domestic demand; a greater proportion of executives expect stronger revenues for their businesses during the forecast period. Over the next six months, 66.2 percent of Saudi firms are forecasting greater sales (against 53.8 percent in Q3), while 28.6 percent think revenues will stay the same (down from 35.8 percent in Q3). Only a slight 3.6 percent of respondents expect revenues to fall.
A signal that firms are striving to remain competitive, the bulk of respondents (54.6 percent) plan to keep prices for their goods and services the same in the next two quarters - that's up from 49.7 percent who said the same in Q3 and is higher than any other point this year. A fifth of respondents plan to raise prices (steady from 18.4 percent in Q3) while a quarter are going to lower them (down from 31.9 percent in Q3), the survey showed. For the next six months, slightly fewer company managers than in the Q3 survey (51.4 percent versus 53.2 percent) anticipate stronger bottom-line performance.
Fluctuations in the performance of the global economy as well as volatility in oil prices would have implications on consumer demand at home. As a result, respondents are vigilant with regard to the extent to which they plan to replenish inventories of goods. Some 37.2 percent of business leaders plan to raise inventory levels in the next two quarters, up sharply from 13.5 percent in Q3. But a majority of companies are still either planning to reduce inventories (31.3 percent) or keep them at the same level they are now (22.2 percent). In the second quarter, half of respondents had plans to boost inventories, again underpinning the qualms managers have about the firmness of the recovery.
Misgivings aside, companies plan to continue to invest in building capacity for the longer term. A majority of business leaders, 57 percent, said they would increase production capacity in the next two quarters (against 53.8 percent in Q3). The ratio of respondents who would reduce production capacity fell to 10.2 percent in Q4 from almost 20 percent in Q3. Meanwhile, 32.8 percent of companies are holding back on investments and keeping capacity as it is (against 26.6 percent in Q3).
A firmer economic backdrop has added impetus to company recruitment plans, which had wavered in the Q3 survey. The proportion of respondents who said they would hire new employees in the next six months rose to 54.9 percent in Q4 from 48.9 percent in Q3. That is still lower than the 61 percent who planned recruitment drives in Q2 but illustrates that the private sector labor market is set for a revival following a stagnant 2009.
There is a long way to go, however, in jumpstarting the job market. The number of respondents who indicated they would put a freeze on new hiring climbed to 34.2 percent from 27 percent in Q3, although none of the companies surveyed said they planned any layoffs.
Reinforcing the pace of bank credit growth remains a key challenge for the Saudi banking system, although sentiment on the outlook for loan accessibility has improved markedly from the first three quarters of the year. The proportion of business leaders to describe banks' lending attitude as "not good" fell sharply to 21 percent in Q4 from 46.5 percent in Q3. That also marks a substantial decline from almost 60 percent of executives who were disappointed with the bank lending outlook in Q1.
The shift in sentiment has happened in tandem with the modest credit recovery that is taking place in the Kingdom. Growth in bank claims on the private sector stood at 3.3 percent in August compared with no growth in December. Credit growth rates remain muted when compared with double-digit levels recorded in 2007 through to early 2009. Banks continue to be vigilant in granting new loans, although the credit scenario is likely to recuperate into 2011 as a greater volume of project financing deals comes on stream.
In the fourth quarter, the largest proportion of respondents, 43.5 percent, said they expected the lending attitude of banks to be "normal" in the next six months (against 34.2 percent in Q3), while 11.5 percent described their outlook for bank lending as "excellent", more than double the percentage that gave the same answer in Q3.
Still, banks have been tightening lending requirements and making it more difficult for businesses and individuals to get loans, the survey showed. A strong majority of 68% of company managers said banks had tightened requirements for loan approvals to businesses and households "substantially" in the past year (up from 63.8 percent in Q3). It appears banks could be getting more strict with policies because in the Q2 survey, only 36 percent of respondents had given the same answer.
Less volatility in equity markets in the third quarter contributed to a return in risk appetite in the Q4 survey. Saudi Arabia's main index, Tadawul, rose almost 6 percent in the three months to Sept. 30, having dropped almost 11 percent in Q2. The positive performance, which has continued into October, is guiding business sentiment regarding potential investments.
Managers indicated a greater propensity for risk when asked which single asset class they expected would provide the best medium-term investment returns. The ratio of business leaders who described cash holdings as the top investment prospect fell sharply to 9.3 percent in Q4 from nearly half of respondents in Q3. Companies would rather park their capital in higher-yielding, more risky investments. Equities took 43.9 percent of the votes (against 15.4 percent in Q3), while the ratio of votes for real estate advanced to 35.9 percent from 14.9 percent. However, the local stock market is still characterized by seasonally low volumes. Bonds and cash trailed far behind at 10.9 percent and 9.3 percent of the tally.
The change in risk attitude corresponds with a rise in the number of survey respondents who expect the stock market will gain ground in the coming two quarters. Managers giving that answer climbed to 34.5 percent in Q4 from 21.3 percent in Q3. While 9.9 percent project declines in equity markets (almost on par with Q3), 27.4 percent anticipate little change in share values over the forecast period. A good proportion of respondents (28.2 percent) are also uncertain what will happen, responding "not sure" to the question.
Banking and petrochemical shares swung back in favor among investors, according to survey respondents - 87 percent of whom cited the two sectors as their most-preferred in the next two quarters, a jump from 47.6 percent in Q3. The banking sector index in Saudi Arabia, which had fallen 9.7 percent in Q2, regained 6.6 percent during the third quarter, with positive prospects ahead as banks are expected to take less-aggressive provisioning against potential bad debt in the coming quarters. Some 45.5 percent of respondents cited banking as top equity pick, followed closely by petrochemicals at 41.6 percent.
Global demand for petrochemicals and their market prices mirror the oil market closely. Expectations of better demand from Asia, in addition to higher oil prices generally, supported petrochemical stocks during Q3. Saudi petrochemicals shares, which had slumped almost 14 percent in Q2, since regained 8 percent during the July-September quarter.
Risk taking also contributed to a dramatic shift in the number of respondents who named telecommunications as their top equity pick. Telecommunications stocks also gained 7 percent in Q3 after falling more than 13 percent in Q2. Investors tend to prefer some telecom shares during periods of uncertainty due to their retail growth patterns. In the Q4 survey, only 6.7 percent of managers chose telecoms as their best equity market bet, down sharply from 36.9 percent in Q3.
Positive sentiment also returned vis-à-vis real estate prices. The number of business leaders who expect real estate prices to fall in the coming two quarters fell substantially to 37.1 percent in Q4 from 61.3 percent in the Q3 survey. In fact, the ratio of managers who expect an upturn in property prices was the highest since the first quarter at 38 percent. In Q3, only 14.8 percent of respondents thought prices would rise, which supports anecdotal evidence of mounting pressure on house prices toward the end of this year.
There is also evidence that commercial real estate prices are sliding and could continue to do so due to oversupply. Another factor accounting for the decline in commercial property prices could be the limited takers willing to pay rents at prevailing prices. Some 17.8 percent of executives polled foresee stagnancy in real estate prices in the coming period, on par with Q3.
