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Businesses in Saudi Arabia Remain Resilient in Their View for Q3 2012

Friday, 3 August, 2012

* The Composite Business Optimism Index for the non-hydrocarbon sector stands at 37 compared to 52 in Q2 2012
* All non-hydrocarbon sectors reveal a drop in optimism levels because of expectations of slowdown in economic activity due to summer vacations and uncertain global conditions
* Composite Business Optimism Index for the hydrocarbon sector drops to 23; selling prices weight.​
JEDDAH – The National Commercial 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 third quarter of 2012.

Background to the Survey

The survey for the Business Optimism Index for Q3 2012 was conducted in July 2012, a time when the outlook for the global economy has become highly uncertain. After a gradual deceleration during 2011, especially in Q4, global growth had started to show some signs of dynamism in the first quarter of 2012. This was due to stronger growth in Asia including Japan as well as Latin America and a modest but sustained growth in the US. In Europe, investor sentiment was calmed by the Greek debt swap as well as the EUR 1 trillion worth of long-term refinancing operations provided by the European Central Bank. Additionally, monetary policy easing in some developing countries contributed to a firming of real economic activity in many countries. However, this momentum seems to be fading and the global economy now faces significant challenges in the near term, with an expectation to grow by 3.5% this year compared to 3.9% in 2011, as per IMF estimates.

The European debt crisis problems still persist and the second quarter saw developments that added fuel to the fire. Political uncertainty increased after the elections in Greece and France, as it raised concerns regarding the ability and willingness of the new governments to implement fiscal austerity measures, while on the financial side, several banks were downgraded and the government of Spain requested a bailout of EUR 100 billion. Surveys of both the manufacturing and service sectors in the Euro zone showed contraction in activity for all three months of the second quarter, while the unemployment rate stood at an all-time high of 11.1% in May 2012.

Deteriorating conditions in the Euro zone will have an even greater impact on trade and credit flows internationally, which will resultantly contribute to a further moderation in global growth. In the US and China, growth is forecast to be slower in 2012. As several debt-ridden advanced economies are cutting back on spending, they are creating headwinds for the faster growing emerging economies.

Commenting on the findings of the survey Prashant Kumar, Senior Manager, Research & Advisory of Dun and Bradstreet South Asia Middle East Ltd:

‘Saudi businessmen have expressed concerns regarding their business outlook in the third quarter of 2012. The BOI survey for Q3 2012 reveals lower optimism levels compared to those recorded in the previous quarter. The hydrocarbon index has dipped to 23 from 43 in Q2 mainly due to the selling price optimism which has plunged 30 points to 8 reflecting uncertainty for oil demand given fragile global recovery. The non-hydrocarbon index too has dropped to 37 from 52 in Q2 as all parameters have declined. Overall, although the optimism levels have lowered, a large proportion of businesses across all sectors still expect expansion of their businesses and new order activity. Businesses expecting a decline have cited a natural slowdown in business activity due to summer vacations and the holy month of Ramadan as primary reasons. 30% of the respondents in the non-hydrocarbon sector foresee factors such as the Euro region debt debacle, uncertain and uneven global economic recovery, negative spillovers due to trade linkage disruptions, etc. as factors impacting their operations in Q3 2012. Reflective of the high infrastructure spending by the Saudi government, the construction sector is the most optimistic among all the business sectors surveyed.”

Hydrocarbon Sector

The BOI survey reveals that Saudi Arabia’s hydrocarbon sector optimism has weakened in Q3 2012. The overall BOI composite score for the sector is at 23 points, 20 points lower than the score in Q2 2012, mainly due to a drop in selling prices expectations. The BOI for Level of Selling Prices has dipped by 35 points to 8 in Q3 2012 from 43 in the previous quarter. A majority (72%) of the respondents anticipates no change in prices, 18% expect prices to rise further and a minor 10% expect a price decline in Q3 2012. Consequently, Net Profits expectations have also lowered for Q3, commensurate with which the corresponding BOI stands at 23, compared to 38 in Q2. The view on increasing workforce in the next quarter has remained largely steady, with the BOI value for Number of Employees witnessing a slight increase to 53 in Q3 from a value of 48 points in Q2.

Non-hydrocarbon Sector

The survey shows that even though sentiments of Saudi business community have weakened in Q3 2012 compared to the previous quarter, overall the outlook still remains positive. The composite index for the non-hydrocarbon sector stands at 37 compared to 52 in Q2. The Saudi economy’s performance has been exceptionally robust and the economy is expected to remain resilient in the current year despite the weak global economic scenario. The BOI survey reveals that despite a decline in the score for all six parameters for Q3, expectations still remain strong. The BOI for the Volume of Sales parameter stands at 39 in Q3 compared to 67 in Q2, while the BOI for the New Orders parameter is recorded at 52 compared to 65 in Q2. The BOI for Level of Selling Prices stands at 15 points in Q3 2012, versus 24 in the last quarter. There is expectation of relative stability or a slight decline in the inflationary pressures in the coming period due to a decline in the world food prices, coupled with stability in domestic price levels. Profitability expectations have also weakened from the previous quarter.

The BOI for the Net Profits parameter is recorded at 37 in Q3 2012, against 54 in Q2. The BOI for Number of Employees remains almost steady, dropping marginally by 4 points from 48 in the last quarter.

Respondents are slightly less optimistic with respect to inventories compared to Q2 2012; the BOI for Level of Stock stands at 29 in Q3 2012, down from 33 in the previous quarter.

Factors Impacting Business:

The expectations towards the overall business environment in Saudi Arabia have improved in Q3 2012 compared to the previous quarter. 45% 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 third quarter of 2012, as compared to 33% in the second quarter of 2012. Around 30% of the respondents who have cited adverse business environment as a key concern, attribute factors such as the global economic downturn, Euro region crisis and currency fluctuations to have an impact on their business operations in Q3 2012. While 11% of respondent businesses were found concerned about availability of skilled labor, another 3% reflected concerns about availability of finance.

62% of the non-hydrocarbon companies have said that they would invest in business expansion in Q3 2012 compared to 40% in the previous quarter.

Commenting on the findings of the survey, Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of the National Commercial Bank, said,

As the signs of dynamism in global economic growth and the effects of long-term financing operations provided by ECB seem to be fading away, 30% of the firms surveyed in the Kingdom indicated that the business environment due the global economy will impact their business operations in the 3Q 2012. Consequently, the Kingdom’s BOI for the non-hydrocarbon and hydrocarbon sectors have weakened in third quarter compared to the second quarter, falling by 15 points and 20 points, respectively. While the substantial drop in oil prices weighed heavily on the selling price parameter and in turn on the BOI of the hydrocarbon sector, the lower reading of volume of sales on expectations of weaker demand in the holiday season has contributed to the drop in the non-hydrocarbon sector’s BOI in the 3Q 2012. However, despite weaker business sentiment relative to the previous quarter, 57% of the firms still anticipate an increase in their sales. Meanwhile, reflecting continued positive economic outlook, 62% of the non-hydrocarbon companies surveyed said that they would invest in business expansion in the third quarter compared to 40% in the second quarter of the current year.

The D&B Business Optimism Index is widely recognized as a key measure of the pulse of the business community, serving as a reliable benchmark for investors, policy makers and other observers of the economy worldwide. As the latest addition to D&B's global series, the Business Optimism Index on Saudi Arabia, done in association with The National Commercial Bank, is issued on a quarterly basis. The next Business Optimism Index on Saudi Arabia will be released in October 2012.

For further information:

National Commercial Bank
Ghassan Hussein Badkook Manager, Corporate Public Relations Tel: +966-2-6463252

About National Commercial Bank

The National Commercial Bank (NCB) was the first bank in Saudi Arabia, established under Royal Decree on the 26th of December 1953, and is the largest bank in terms of capital in the Arab world. The Bank’s paid up capital at year-end 2007 was USD 4 billion.

The National Commercial Bank has been a pioneer in the Saudi banking industry, and was the first bank to offer mutual funds in the Kingdom. Since the beginning of the 1990s, the Bank has been one of the trailblazers in Islamic Banking, providing a wide range of innovative Islamic product and services.

The National Commercial Bank has one of the largest branch networks in Saudi Arabia, and also operates 2 international branch offices in Beirut and Bahrain, and 3 representative offices in London, Seoul, and Singapore. True to its Islamic roots, the bank has a prominent role in the area of social responsibility through a range of social programs.

About Dun and Bradstreet

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