Oil to stay above $100 for 6 months

Oil prices are expected to remain above $100 a barrel because of regional turbulence and this will boost growth prospects in Saudi Arabia, according to a survey of business leaders in the Gulf Kingdom.

While the improvement is tempting local firms to suspend a freeze on hiring plans, instability has triggered investment uncertainty and is pushing business leaders to shun equity and turn to cash and bonds for investment, showed the survey conducted by Banque Saudi Fransi (BSF).

“Regional political instability has had the dual effect of bolstering Saudi Arabia’s economic condition by driving up oil prices and stirring uncertainty among investors… company managers revealed in the Q2 2011 BSF Business Confidence Index that they are more bullish about the future performance of the broader economy as well as their own businesses as oil prices above $100 a barrel assure that the economic recovery is on firm footing,” it said.

“For the first time in four quarters, a majority of business leaders expect to hire more staff, and the ratio that expect to raise investments in production capacity has risen consistently for the past six quarters…..when it comes to charting out their business plans, therefore, businesses operating in Saudi Arabia are much more optimistic than they were just six months ago.”

The survey showed oil prices are likely to continue trading above $100 for the next six months, boding well for an upturn in the Saudi economy that would have “knock-on” benefits for sales and profits of businesses operating in the kingdom.

Yet regional political uncertainty appears to have upset the risk appetite of Saudi Arabia’s business leaders, who have considerably altered their investment strategies to reduce their exposure to more volatile asset classes, BSF chief economist John Sfakianakis said in the survey, sent to Emirates 24l7.

It showed all 831 respondents to the survey expect oil prices to remain above $100 a barrel for the coming two quarters, including around 76 per cent supposing prices will stay above $110 a barrel.

The report said higher oil prices and greater production have enhanced the overall expectation about the business community’s growth prospects, with a majority of company executives surveyed charting out plans to increase production and hire new staff in the next six months as the vast majority count on a revival in bank lending.

“Still, there has also been a shift in investment attitude coinciding with recent weakness in regional equity markets and political uncertainty afflicting several countries in the region,” Sfakianakis said.

“The survey indicated a move is taking place toward regarding low-risk investments in cash and bonds as more favourable than equity investments. A majority of respondents also expect inflation to rise in the coming period after the government handed out one-time bonuses to employees as part of a sweeping SR485 billion citizen support package unveiled in the first quarter.”

The report showed the index rose slightly to 101.7 points in Q2 2011 from 101.3 points in Q1 2011, continuing along an upward trajectory initiated 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 Q2 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.

It was conducted between March 19 and April 6. Among the survey’s key findings are: A substantial 84 per cent of business executives foresee an improvement in their companies’ profitability over the survey period, up from 80.1 per cent in Q1 and around 51.4 per cent in Q4.

“This is the strongest profit outlook since the survey was launched in 2009, reflecting the likelihood of greater private consumption and consumer confidence as oil prices scale 2- -year highs,” the report said.

“Risk aversion has once again gripped investors, with 44 per cent of business leaders ranking cash holdings as the best medium-term investment prospect, ahead of bonds, equities and real estate. This marks a drastic shift from the Q1 survey, when 71.5 per cent of respondents chose equities as their top investment pick and none picked cash. This change of opinion corresponds with prevailing uncertainty about the performance of the local equity market.”

Despite better economic prospects, the survey found that bank lending is not likely to recover quickly in the next six months, with the number of respondents describing the upcoming lending attitude of banks as “very good” or “excellent” falling slightly to 73 from 78 per cent in the first quarter.

“Yet, the overall credit outlook has improved markedly in the past year as banks begin to slowly boost the pace of new lending and borrower appetite improves.”

According to Sfakianakis, Saudi Arabia, which derives almost 90 per cent of fiscal revenue from oil exports, has increased crude oil output since January to compensate for a shortfall left by Opec producer Libya, currently embroiled in a political crisis that has halted oil exports.

He said crude oil prices are a crucial gauge of confidence in the Saudi economy, which he expected to record GDP growth of about 5.5 per cent this year, in addition to posting twin fiscal and current account surpluses.

“Against this positive energy price backdrop, it is not surprising that the proportion of survey respondents expecting the Saudi economy’s performance to be ‘much better’ in the coming period rose to 87.8 per cent, against 76.7 per cent in Q1. The remaining respondents said the economy would perform ‘better.”

While economic growth is expected to accelerate this year, the government rather than the private sector will continue to be its biggest driver, he said.

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