The recruitment outlook of Saudi business leaders was the strongest in two years after the government gave companies until September to comply with employment quotas, Banque Saudi Fransi’s third-quarter (Q3) survey of business confidence revealed.
A substantial 82.4 percent of business executives expect to be hiring in the next six months, up sharply from 58.9 percent in Q2.
Executives are confident in being able to afford the higher human resources costs.
Elevated oil prices above $90 a barrel are seen boosting corporate revenues and profits in the coming two quarters, the survey of 693 executives showed.
Business leaders remain cautious about their investment strategies, with a slight majority continuing to favor holding bonds and cash in the short term over equities and real estate.
The BSF business confidence index edged higher to 101.9 points in Q3 2011 from 101.7 points in Q2 2011, continuing along an upward course that began in Q4 2010.
The base value of 100 represents the third quarter of 2009, which marked a period of economic weakness following the global financial crisis.
The Q3 survey drew on perspectives of top managers across various sectors: finance, real estate and construction, information technology, petrochemicals and industry, agriculture, tourism, advertising and legal affairs. Field research was conducted between June 4 and June 18.
Some 88.6 percent of business executives expect their companies will report improved bottom-line performance in the next six months, up from 84 percent in Q2, as sales rise due to a combination of higher oil prices, better economic growth and renewed private consumption. A substantial 88.2 percent of managers see the Saudi economy performing “much better” in the next two quarters.
* Respondents’ bank lending outlook fell for a second straight quarter, reflecting a prevailing view that credit extensions are unlikely to grow quickly over the survey period. The number of respondents describing the lending attitude of banks as “very good” or “excellent” fell to 38.9 percent, down sharply from 78 percent in the second quarter. A greater number of respondents also said that banks had tightened requirements for loan approvals “substantially.”
* Views on the equity market improved only cautiously in Q3. Only 27.1 percent of executives anticipate positive performance in the stock market over the forecast period, up from 18.8 percent in Q2 but still sharply below the 74.7 percent who were bullish on shares in Q1. Cement company stocks were favored over banks, petrochemicals and telecommunications in the survey, reflecting an upturn in demand for building materials as the Kingdom pursues various real estate projects.
In the Q2 survey, almost a third of respondents foresaw oil prices soaring to above $120 a barrel as political instability in the Middle East, particularly in Libya, raised the risk premium of oil prices.
Brent prices did surpass $120 a barrel in April, while US crude averaged $110 a barrel that month.
Since then, oil prices have eased slightly - US crude averaged $97.9 a barrel in the first three weeks of June - as Saudi Arabia pledged to increase production despite a disagreement among OPEC members over raising oil output.
Oil output in Saudi Arabia climbed to about 8.8 million barrels per day in May and is likely to rise further this summer as OPEC’s largest producer seeks to increase supply to Asia and temper oil prices.
Even with new supply, respondents to the Q3 survey overwhelmingly expect oil prices will range between $100 and $120 a barrel in the next six months.
The biggest proportion of respondents at 51.4 per expects the price of crude will fluctuate within the $100-$110 band over the period.
A decent 28.4 percent of respondents predict oil prices will fluctuate between $90 and $100 a barrel.
Oil prices and output levels provide a crucial gauge of confidence in the Saudi economy since the state derives almost 90 percent of fiscal revenues from oil exports.
Some 88.3 percent of respondents (versus 87.8 percent in Q2) expect the Saudi economy’s performance will be “much better” in the next six months as a result of the positive energy price environment, in addition to the likely revenue boost Saudi Arabia will get from raising production.
The remaining respondents said the economy would perform “better.”
The Saudi economy is likely to grow 5.5 percent this year, with the government posting twin fiscal and current account surpluses, according to our forecasts.
Most of this growth will come from the oil and government sectors, while private sector expansion should remain below trend levels.
The positive oil price environment will make it easier for the government to finance a near SR500 billion, multiyear public investment program unveiled by the king in the first quarter to support various social initiatives by creating jobs, building homes, raising wages, and paying out bonuses and unemployment benefits.
A one-time bonus paid out in the first half of the year to state and many private sector employees was initially expected to have wide implications on short-term inflation in the Kingdom, although thus far their affect has been muted. Inflation in May fell for a ninth month to 4.6 percent, mostly due to reduced pressure on rents and lower food inflation. Prices still have the potential to pick up toward Ramadan.
Among respondents, some 47.9 percent said they expected inflation to rise over the forecast period (versus 52.8 percent in Q2), while 28.6 percent expect the rate of inflation to stay the same (against 24.1 percent in Q2).
The number of executives who anticipate inflation will fall was virtually constant at 23.5 percent (versus 23.1 percent in Q2), reflecting a view that price pressures could pick up in the second half of the year.
Following a slight pick-up in expectations for currency reform in the Q2 survey, an overwhelming 87 percent of respondents said they do not expect the government to change the Saudi riyal exchange rate in the next two quarters.
The remaining respondents were “not sure” about future currency policy.
Saudi Arabia pegs its riyal to the US dollar and in Q2, as the US dollar weakened versus the euro, some respondents had altered their perceptions about the likelihood of exchange rate reform; 11.3 percent thought some change could take place.
The Q3 survey witnessed a big change in companies’ recruitment plans coinciding with the government’s announcement of the Nitaqat Saudization scheme.
Nitaqat divides companies into four categories (excellent, green, yellow and red) depending on whether they employ enough Saudi nationals to comply with a band of 250 quotas that vary based on the sector and size of the company.
The aim of the program is to give incentives to companies that hire an adequate number of nationals and penalize firms, which rely heavily on foreign labor.
Some 90 percent of private sector employees in 2009 were expatriates, which has exacerbated the Kingdom’s youth unemployment problem.
Penalties for failing to comply with quotas include revoking a company’s right to issue new visas for foreigners or renew existing ones.
Up to 40 percent of companies could struggle and possibly be forced to shut down as a result of the policy.
The survey, conducted as firms were informed this month of their Nitaqat status, showed recruitment efforts would pick up very quickly.
A huge 82.4 percent of respondents said they planned to hire in the next two quarters - up from 29 percent in Q1 and the highest result since the survey was launched in 2009.
Only 6.2 percent of firms expect to maintain a hiring freeze over the period, down from more than half in Q2.
Emphasis on recruitment is not exclusive to the private sector; the state pledged to create tens of thousands of public sector jobs this year for teachers, health diploma holders and those working in security forces and market supervision.
Extensive hiring is happening as companies plan for better corporate performance this year.
Some 88.3 percent of respondents expect revenue growth to rise in the next two quarters (against 81 percent in Q2), as private consumption picks up and oil prices buoy the economy’s expansion.
The remaining respondents think sales will “stay the same” during the forecast period.
Higher sales will largely offset the rise in costs related to new staff, the survey showed, with 88.3 percent of executives also assuming their companies’ would record stronger profit growth over the period (up from 84 percent in Q2).
Cumulative profits of the country’s commercial banks, for instance, climbed in March and April following two years of declines due to subdued lending and high provisioning.
Anticipation of greater consumer demand has prompted companies to look to raise prices for their products and services, but not significantly so.
Some 43.2 percent of company managers surveyed said they would raise prices in the next six months (up from 37.8 percent in Q2), while 6.3 percent said they planned to lower prices (down from 15.6 percent in Q2).
A decent 42.4 percent of executives will keep prices steady in the forecast period, up from 38 percent in Q2.
In the second half of 2010, less than 20 percent of companies had indicated they planned to raise prices, so the trend is shifting, likely due to the higher oil price environment and the fact that bonus payments have increased the buying power of citizens.
An air of caution remained among companies with regard to their inventories.
Just under a quarter of respondents said they would raise inventories in the coming period, with most saying they would either reduce them (33.3 percent) or replenish them such that they remain at current levels (29.3 percent).
The number of executives who planned to reduce inventories fell from 52.6 percent in Q2, which had been the highest giving that answer since the survey’s launch.
That companies are not rushing to raise inventories could indicate they expect that the effect of higher bonus payments on citizen’s purchasing patterns would only be short term.
Still, the government has also raised wages of civil service employees, which would have a more lasting effect on building consumer demand.
Companies remain hesitant about the pace of Saudi Arabia’s economic recovery since government spending has driven the revival rather than a genuine return in private sector demand.
Our forecast for private sector GDP growth this year is 4.2 percent - not high enough to stimulate job creation in the Kingdom.
Nonetheless, firms are beginning to invest more in their businesses.
A huge 88.3 percent of managers said production capacity of their companies would increase in the next two quarters - the highest such response since the survey was launched, and up from 74.3 percent in Q2.
This suggests private businesses are optimistic that the state’s spending outlays would increase demand for their products.
One of the cornerstones of a successful economic recovery is the pick up in bank lending.
The rise in oil prices and output, and generally better outlook for economic growth, has not been reciprocated by any notable upsurge in the lending activity of banks.
Bank lending has struggled to expand in the past two years after screeching to a halt on the heels of the global financial crisis.
After years of double-digit loan expansion, banks were compelled to take provisions against bad debt and revise their lending rules even to long-established family businesses in the Kingdom.
Now, loans go through a much more rigorous approval process.
Growth in loans to the private sector edged slightly downward in April to 6.9 percent from seven percent a month earlier.
While up from virtually no growth at the start of 2010, lending to the private sector should be higher at this stage in the recovery process.
In order to keep its ambitious infrastructure expansion plans on track, the government has filled the financing gap to a large degree.
This strategy is unlikely to shift anytime soon; survey respondents said the lending attitude of banks is not improving in any marked way.
Only 28.2 percent of managers said the lending attitude of financial institutions would be “excellent” in the next two quarters, down from 39.4 percent who gave the same response in Q2.
Meanwhile, a significant 30.2 percent called banks’ lending attitude “not good,” the highest proportion to give that response since the third quarter of 2010.
Another 30.9 percent of managers described banks’ lending attitudes as “normal” (up from 14.9 percent in Q2).
The survey results also point to greater tightening of loan requirements taken by banks in the country.
Some 85.6 percent of respondents — the highest in a year and a half — said banks had “substantially” tightened requirements to approval loans to corporates and households in the past year.
The remainder of respondents agreed that banks’ lending rules were “noticeably” more stringent this year.
These results are puzzling given that loan growth is improving and the low interest rate environment has created a backdrop conducive for banks to lend more.
The sentiment could indicate banks are selectively lending only to long-term projects in which the private sector has formed a joint venture with the government.
Small- and medium-sized private firms, on the other hand, may face difficulty in obtaining loan application approvals, which would underpin the negative perceptions.
Interest rates, meanwhile, are likely to hold at current levels, respondents said.
A majority of 87.9 percent of respondents expect interest rates will “stay the same” in the next six months, up sharply from 52.2 percent in the Q2 survey. Only 3.1 percent of respondents anticipate rates will rise.
As investors, company executives persisted with their precautionary stance according to the Q3 survey, which
Asked how they anticipate the stock market will perform in the next two quarters, 27.1 percent of managers said they foresee “positive” performance, up from 18.8 percent in Q2, but far below the 74.7 percent who gave the same answer in Q1.
The greatest share of respondents said they expected the market would remain “flat” (up from 15.5 percent in Q2), while 19.8 percent predict drops on the bourse (down from 34.9 percent in Q2).
A decent 16.7 percent were unsure.
Illustrating a shift in investment appetite, some 43.6 percent of respondents chose cement above petrochemicals, banks and telecommunications sectors as their most-preferred equity sector, up from 22.7 percent in Q2 and just 2.3 percent in Q1.
That is the strongest support the cement sector has received since the survey was launched.
In April, Saudi cement companies reported a 16 percent rise in sales, linked to a greater number of infrastructure and housing projects being pursued in the Kingdom.
The Saudi housing market needs 1.65 million new units by 2015 to meet demand due to a surge in the youth population and the smaller size of Saudi families.
This year, the king made a considerable call to allocate SR250 billion to the General Housing Authority to finance immediate construction of 500,000 new units.
The expansive plans have lifted cement shares 22 percent so far in the second quarter, compared with growth of just 1.8 percent in Q1.
After cement, petrochemicals were cited as the most preferred sector by 25.7 percent of respondents, down from above 50 percent in Q1 and Q2.
Petrochemical shares tend to track the performance of global energy markets, with rises in world demand for oil indicating a corresponding pick up in demand for chemicals and plastics.
The petrochemical index has remained mostly flat in Q2 after rising 2.1 percent in Q1 and 15.6 percent in Q4.
Banks trailed cement and petrochemicals with 22.8 percent support among managers, up from 18.1 percent in Q2.
The rise is likely due to the fact that lenders in the Kingdom are swinging profits for the first time in two years.
The Tadawul banking index fell 8.7 percent so far in Q2, having slipped 0.5 percent in Q1.
Some investors could anticipate a rise in banking shares once the institutions begin showing decent rates of bottom-line growth this year.
Telecommunications shares, meanwhile, are down about three percent this quarter.
Only 4.8 percent of respondents chose telecoms as their preferred equity pick, down from 7.9 percent last quarter.
As the government gets set to attempt to rectify a mismatch in supply and demand of real estate, a greater proportion of survey respondents expect prices will stabilize in the meantime.
Some 28.6 percent of managers who responded to the Q3 survey said they saw real estate prices staying the same in the next six months - up from only 10.8 percent who gave that answer in Q1.
Still, the biggest section of respondents anticipates price hikes will continue; 47.9 percent said prices were likely to rise in the forecast period, down from 52.8 percent in Q2.
A notable 23.5 percent of executives, meanwhile, see real estate prices falling in the next two quarters (versus 23.1 percent in Q2).
Saudi Arabia’s government, realizing it has a potentially explosive youth joblessness dilemma on its hands, unveiled a new employment strategy for nationals that, if enforced, should change how the private sector operates.
Results of the third-quarter BSF Business Confidence Index show companies have taken the new policy to heart, and a majority of businesses are looking to recruit new staff in the coming six months.
A massive 82.4 percent of companies will hire during that period, which is far greater than any quarterly survey since the financial crisis.
The implications of the Nitaqat strategy on companies’ bottom-line results will need to be assessed in the second half of the year to see whether the higher costs related to human resources would cut into corporate profitability and productivity.
For the time being, companies are bullish about their business plans, a majority anticipating improved profits and revenues into the second half of the year as private consumption rises, and higher oil prices and robust government spending generate momentum in the economy.
Most business leaders are planning sizeable investments in capacity expansion in order to meet growing demand.
Saudi Arabia needs oil prices to stand above $80 a barrel in order to balance its budget this year following a substantial increase in expenditures to finance one-off employee bonuses, the creation of new jobs, civil service salary hikes, an unemployment benefit and a slew of new property construction projects.
Respondents said oil would definitely hold above $90 a barrel in the next two quarters, with most anticipating they would stay above $100 a barrel.
This gives the state a cushion to continue playing a leading role in financing projects.
Still, there were a number of notes of caution in the third-quarter survey results, most important of which was the outlook for bank lending.
There was a big and somewhat concerning rise in the number of managers who termed banks’ lending attitude “not good,” and a good drop in the ratio of those expecting an “excellent” attitude.
When the government provides interest-free loans to finance key, credit-worthy projects in transportation, construction and industry, it risks crowding out the banking sector and dissuading a credit recovery.
This month, the state offered Saudi Electricity Co. a $13.6-billion loan to finance 70 percent of its projects in the next five to six years.
This level of support is crucial, but the government must be careful to encourage local banks to participate as well.
Saudi Electricity also signed a near $1 billion 12-year loan with banks this month, but all of them were international banks.
Another aspect hindering a credit recovery is that banks are unwilling to lend without thorough credit checks.
It is important that banks should be more rigorous when it comes to granting loans, but a large category of medium-sized businesses are likely being excluded from both government funding and bank financing.
This gap should be bridged in order to ensure that a vibrant private sector is able to flourish and sustain job creation for the Kingdom’s predominately young population.
Companies are also hesitating to boost their inventories significantly, a sign that managers remain uncertain about the pace recovery.
They are skeptical about the longevity of growth in private purchasing patterns, which spiked in Q2 due to state and private sector bonuses.
A big divide exists between government and private sector wages.
Higher wage equilibrium must be achieved before individuals gain greater buying power, which would be a boon for companies as well.
The BSF Index attempts to gauge market sentiment on a quarterly basis, using a comprehensive survey conducted by the bank.
The Q3 2011 survey was carried out June 4 to June 18, based on a sample of 693 respondents in companies in a variety of sectors.
The respondents are representative of all three main business regions in the country - with 36 percent from the Central Region, 31 percent from the Eastern Region and 33 percent from the Western Region.
Researchers used the following formula to calculate the overall index level. Index = •w.Di / (base value XX =100); where w is weight, Di is net balance of question i. Weights are assigned to each of the survey questions we use in the Index. For balance, responses of a subjective nature have been eliminated when preparing the diffusion index.
The BSF Business Confidence Index has a base value of 100, which corresponds with the third quarter of 2009.
Higher scores indicate a positive result, while scores below 100 demonstrate that business confidence is on a falling trend.
Advertising: 14.3 percent
Agriculture/dairy: 2.9 percent
Construction: 28.6 percent
Financial institutions: 4.3 percent
Information technology: 11.4 percent
Law offices: 2.8 percent
Petrochemicals/industrial: 14.3 percent
Real estate: 14.3 percent
Tourism: 7.1 percent
Chairmen: 42.8 percent
CEOs: 35.7 percent
Vice-presidents: 14.3 percent
Middle managers: 3.6 percent
Junior managers: 3.6 percent
Additional support provided by the Gulf Research Center (GRC)
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