Confidence bullish as UAE charts strongly on path to recovery

The UAE?exhibited the strongest growth in business sentiment as the overall Business Confidence Index (BCI) in the GCC shot up from 75.9 in the second quarter to 81.4 in the third, the highest since October 2008.

According to the HSBC Gulf Business Confidence Index, there was a surge in business confidence among corporates across the GCC, with the UAE gaining six points in the index from the second quarter. The results support a poll of UAE trading companies conducted earlier by HSBC, which showed the UAE was one of the top three most confident countries in the world on trade activity and growth.

Simon Williams, Economist, HSBC Bank Middle East, told Emirates Business: "To my mind, overall prices of oil have the most positive impact on sentiment followed by the political situation and availability of real estate. The 15-point increase in the 3Q09 score for the UAE from its 1Q09 low point shows the sharpest turnaround in sentiment."

Fouad Alaeddin, Middle East Region Managing Partner, PricewaterhouseCoopers, said: "Growth in business confidence in the UAE can be attributed to the unprecedented construction activity in Abu Dhabi and the strong monetary support given by the central bank and the federal government to the banking sector. In addition, the UAE continues to be attractive to global investors interested in the emerging markets."

On almost all measures, the region's businesses see better times ahead: on turnover, profit margins, and meeting their targets for the year, and there is a marked increase in optimism since the first quarter of this year.

"It is very clear from the survey that the region is going into recovery mode," Williams said. "However, it is important to note that the uptick in sentiment is fragile. We are seeing a return to normality, however risks remain. We are still a long way off the exuberant highs of Q1 2007.

"The contributing factors to this boost in confidence can be attributed to a number of factors. The run-up in global equity markets and strengthening oil prices have established a much more supportive external environment than was the case a few months ago. An increase in regional public growth, a pick-up in asset prices across most of the region and a steady reversal of the downward pressure on retail prices is also likely to have helped business sentiment."

According to the BCI, an increase of 10 points was seen on the index since the first quarter of 2009 as businesses appeared to be on the recovery path.

Bahrain exhibited the highest gain of eight points between the second and the third quarter riding on an upward trend observed across all countries in the GCC. Kuwait and Oman by and large maintained parity with previous wave results.

While Saudi Arabia scored the highest on the confidence index, the UAE registered the lowest score.

The index showed Saudi returning to the pre-downturn index level, with just three points less than the index 12 months ago. Qatar showed a linear upward trend with a gain of five points. Meanwhile, Oman, prior to the financial downturn, had exhibited relative stability in its index before touching a low of 70.6 in the fourth quarter of 2008.

"If we look at what is happening in the region, the most significant factors having an impact on confidence are obviously the increase in oil prices and the rise in international stock markets," Alaeddin said. "There are several factors boosting business confidence in the Kingdom of Saudi Arabia. Being the largest oil exporting country, Saudi clearly benefits from high oil prices.

"On the other hand, the Saudi government has not been impacted by the global economic crisis through equity investment. The government has also made considerable investment in infrastructure. Furthermore, the growing population provides a large local market with good purchasing power. Finally, the rise of the Saudi stock market clearly works in its favour."

Asked if this confidence boost would fuel recovery in the region, Williams said: "While the results of the October survey strengthens our view that the region is now poised for recovery, we also see support for our argument that it will take time for the turnaround in activity to gain traction.

"All of the sentiment readings remain sharply down year on year, including the headline score which had never fallen below 90 until 3Q08. Although Gulf businesses appear optimistic that the markets in which they operate are set to expand, there is a sense from the data that some fear the pick-up will be insufficient to take up existing spare capacity.

"The continued difficulty of accessing credit for private sector corporates also weighs on confidence, particularly among small and medium-sized enterprises," he said.

According to the survey, 34 per cent businesses predicted a growth in revenue in the next three months, up from 29 per cent in the second quarter of 2009. Around 30 per cent foresee an increase in profit, with only 13 per cent predicting fall in profits.

As much as 26 per cent hoped for higher investment levels, compared to 22 per cent in the second quarter. Only 16 per cent businesses expect to see their workforce shrink in the next year, compared to 25 per cent who reported job losses in the past 12 months.

As many as 54 per cent of respondents say they expect business to improve overall, compared to 42 per cent in the first quarter this year.

The survey says there has been an increase on several fronts in terms of optimism. As compared to the second quarter of 2009 there was an increase of six points in optimism on revenue growth; five points in growth of profit margins; four points on quarterly budgets and three on meeting targets. However, there has been no significant change in defence against competition and staffing requirements.

There was a five per cent increase in positive sentiment on business turnover in the Middle East in the third quarter as against the second quarter of this year. There was also a marginal rise of two per cent on positive sentiment about hike in profits.

With the signs of recovery from recession, respondents believe investments budgets will rise, probably to expand and aid business growth in the coming quarter. There is a further six per cent surge from the first quarter, a total of 12 per cent in the opinion about overall performance.

The survey revealed a marginal rise on positive sentiment across all parameters from the second quarter and, more encouragingly, the negative opinion about the slowing global economy has diminished further.

However, Williams had a word of caution: "Although the upturn in confidence is apparent across the region, the survey also points to significant variation in expectations between states, with Saudi Arabia consistently showing itself to be the most upbeat on near-term performance.

"At 92 points, the headline confidence score is not only the strongest in the region by some margin, but is also close to returning to levels reported over the first half of 2008. The 15-point increase in the Q3 09 score for the UAE from its Q1 09 low point shows the sharpest turnaround in sentiment, but at 72 points the headline score stands more than 10 points below that reported for any other regional economy."

According to the survey the data on employment intentions highlight both the divergence in regional performance, and the still cautious nature of the economic recovery underway. In aggregate, the number of respondents expecting to increase staff levels was twice as high as the number expecting to cut, suggesting that overall employments levels are set to rise. That 21 per cent of respondents in the Q3 09 survey said they feared they would not be able to recruit and retain the staff they required (a fall of just six percentage points on the end-08 reading) is also an indicator that on aggregate the labour market remains relatively tight.

However, it is noteworthy that some 16 per cent of respondents in the Q3 09 survey said they expected to cut staff over the coming 12 months even though they anticipate recovery; the reading stands down only modestly on the 20 per cent that reported plans to cut jobs in the Q2 09 survey.

"In part the uptick in sentiment simply reflects the shock induced by the onset of global recession being displaced by confidence that an even more severe downturn has been avoided and hopes that a sustainable global pick-up is underway," Williams said.

"The run-up in global equity markets and rising oil prices have established a more supportive external environment than was the case a few months ago. A pick-up in asset prices across most of the region and a steady reversal of the downward pressure on retail prices is also likely to have helped sentiment. Our sense is that the upturn in sentiment is still building momentum, and we anticipate further gains in the headline score when the fourth quarter survey is completed."


Survey says

- 34 per cent predict growth in revenue in the next three months, up from 29 per cent in Q2 

- 30 per cent foresee increase in profit, with 13 per cent predicting profits will fall in the rest of 2009 

- 26 per cent predict higher investment levels, compared to two per cent in the second quarter 

- 16 per cent expect to see their workforce shrink in the next year, compared to 25 per cent who report job losses in the past 12 months 

- 54 per cent say they expect business to improve overall, compared to 42 per cent in the first quarter this year.

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