Strong oil prices and higher output allied with massive spending plans to lift the business mood in Saudi Arabia to new highs despite concerns about the availability of skilled labour and bank finance, a local survey has shown.
The Business Optimism Index (BOI), set up by the Gulf Kingdom’s largest bank, National Commercial Bank (NCB), gained three points in the second quarter compared with the previous quarter, NCB said.
“An increase of three points in the composite index has taken business sentiments in the non-hydrocarbon sector to an all-time high,” the bank said in its eight-page survey, sent to Emirates 24.
“High oil prices, a robust economy and a string of new social and economic initiatives for citizens, unveiled by the royal decree in the first quarter have strengthened the business outlook.”
NCB noted that the initiatives, announced by King Abdullah over the past few weeks, envisage higher wages and bonuses to state employees, introduction of unemployment benefits, construction of new housing projects, home finance schemes and creation of jobs.
The announcements amounting to nearly $130 billion will boost the Kingdom’s public spending to an all-time high this year but the budget will still record a surplus because of higher crude prices and production, it said.
The rise in oil output, coupled with greater state spending commitments, has also heightened the prospects for higher GDP growth this year.
Further, higher oil exports and higher energy prices will help the country achieve a favorable current account balance this year, the report said.
The BOI, set up with the help of Dun and Bradstreet, a global business information agency, reveals that the Saudi non-hydrocarbon sector is expecting a rise in demand levels in the second quarter of 2011.
The BOI for the Volume of Sales has registered a value of 78 compared to 75 in Q1 2011, while the BOI for the New Orders parameter is up by 4 points to 78.
The BOI for Level of Selling Prices stands at 46 in Q2 2011, up from 42 in the last quarter. Saudi Arabia’s annual inflation slowed to a 10 month low of 4.9 per cent in February, with growth in housing and transport costs subsiding.
“However, the huge expenditure planned by the government is likely to build up inflationary pressure in the coming months. Also, pressure from housing costs, along with food inflation will pull up prices,” NCB said.
“The strength of expectations in demand and prices is also driving expectations for profits and inventory levels. Strong sales expectations are flowing through to profits, with this index rising to 82.”
Respondents to the survey expect to add on to existing inventories to meet the expected rise in activity, according to the report, which noted that the BOI for Level of Stock stands at 51 in Q2 2011, up from 41 in the previous quarter.
The BOI for Number of Employees remains virtually unchanged, declining by a single point to 56 from 57 in the last quarter.
Among the sectors surveyed, the transport & communication sector is most optimistic with respect to demand conditions in the second quarter of 2011, recording the highest BOIs for Volume of Sales and New Orders.
“The transport & communication sector is most optimistic regarding profits, along with the construction and finance and real estate and business services sectors.”
Outlook regarding factors likely to adversely influence business operations in the second quarter of 2011 reveals upbeat business sentiments, NCB said.
“Around 55 per cent of the respondents do not anticipate any negative factors coming into play in the second quarter of 2011. Availability of skilled labor is a key concern for 21 per cent of the firms, while 14 per cent expect that availability of finance will impact business operations in the second quarter.,” it said.
“Nearly 53 per cent of the firms plan to invest in business expansion….. this figure has increased compared to the previous quarter.”
Turning to the oil sector, NCB cited OPEC data showing Saudi Arabia pumped around 8.869 million bpd of crude oil in February, up from 8.589 million bpd in January and 8.461 million bpd in December 2010.
“The Kingdom’s economy is set to witness a strong year with the bullish oil price environment, favorable global scenario, better credit conditions, revived business sentiments, enhanced consumer confidence and government spending which will remain the main source of economic growth in 2011,” it said.
“The BOI survey reveals that Saudi Arabia’s hydrocarbon sector optimism remains strong in the second quarter of 2011. The overall BOI composite score for the sector is 50 versus 49 in the first quarter of 2011, due to a higher BOI score for the Level of Selling Prices parameter.”
It showed respondents expect prices to rise further as demand for oil remains strong and tensions in the Middle East show no signs of abatement.
The BOI score for Level of Selling Prices is 53 in the second quarter of 2011, compared to 48 in the previous quarter.
Around 58 per cent of the businesses expect prices to go up in the second quarter of this year while 37 per cent anticipate no change.
“The net profits expectations of the industry players remain unchanged over the previous quarter, the BOI for which is recorded at 50.”