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Saudi business conditions to improve further in near term

Published: Updated:

The Saudi Business Optimism Index (BOI) survey for Q4 2013 revealed rising optimism in the non-hydrocarbon sector, while the hydrocarbon sector outlook moderated on quarter-on-quarter (q-o-q) basis.

The latest BOI report released Monday by the National Commercial Bank, in association with Dun & Bradstreet South Asia Middle East Ltd, showed that the composite BOI for the non-hydrocarbon sector advanced by 5 points q-o-q and by 7 points y-o-y due to a strong outlook on volumes, new orders and profitability, with hiring outlook strongest in the construction and manufacturing sectors.

It noted that within manufacturing, companies engaged in non-petrochemical manufacturing hold a more positive outlook compared with petrochemical manufacturing firms.

Outlook for investment in business expansion remained steady for the non-hydrocarbon sector, but improved for the hydrocarbon sector, as 68 percent of hydrocarbon sector firms and 65 percent of non-hydrocarbon sector firms do not foresee any factors hindering business operations in Q4 2013.

Manufacturing and finance, real estate & business services sectors were the most optimistic with reference to business expansion plans.

However, more than half of the respondents (51 percent) perceived that the new labor policies will have a negative impact on the business, while the remaining 49 percent didn’t see these as a challenge.

In the hydrocarbon sector, the survey further revealed that optimism levels for Saudi hydrocarbon sector rise year-on-year.

However, the BOI score in Q4 has moderated compared to the previous quarter. The composite BOI for the hydrocarbon sector stood at 30 for Q4 2013 compared to 25 in Q4 2012 and 39 in Q3.

The decline in the quarterly composite score is mainly attributed to the weakened outlook of the sector respondents with respect of selling prices and profitability.

The BOI for selling prices stood at 13 in Q4 2013, which is 17 points lower than the BOI in Q3. Respondents have cited higher competition from local as well as international players leading to a drop in selling prices.

In addition, a few respondents have renewed contracts at lower prices. Reduction in selling prices coupled with rising expenses has resulted in a lower profitability outlook for this sector.

Moreover, the composite business optimism index for the non-hydrocarbon sector has improved by 5 points q-o-q to stand at 54 in Q4 2013.

The improvement in outlook is due to stronger expectations on volumes, new orders and profitability as respondents expect new projects/contracts, seasonal improvement in demand, and better market conditions.

The BOI for Volume of Sales stood at 63 compared to 52 in Q3, with a majority 72 percent foreseeing an increase in sales. The BOI for Net Profits parameter has gained 9 points this quarter and reached a score of 60 points; 69 percent of the respondents anticipate profitability to improve in line with the increased expectations on sales volumes and demand.

The hiring outlook remains strong in Q4 with the BOI at 47 points; 50 percent of the respondents will increase their head count in Q4 2013.

The construction sector is the most optimistic among all non-hydrocarbon sectors this quarter in terms of the overall outlook; the composite BOI has risen 14 points to 70 from 56 in Q3 2013.

The primary reason for the improved outlook for the construction sector is the increase in new construction projects. The transportation sector holds the least optimistic outlook for Q4 2013; the composite BOI has fallen 13 points from the previous quarter’s score.

Respondents in the transportation sector have highlighted global slowdown in the industry as well as high competition to be the key reasons for decline in sales volume.

Within manufacturing, companies engaged in non-petrochemical manufacturing hold a more positive outlook compared with petrochemical manufacturing firms. Hiring outlook is strongest for the construction and manufacturing sectors.

Commenting on the findings of the survey, Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of NCB, said “the BOI of 4Q 2013 is indicating that more Saudi companies expect business conditions to improve further in the near term, as all the parameters, with the exception of the selling prices, reflected increases, yet with varying degrees across the different non-hydrocarbon sectors.

Respondents to the survey in the non-hydrocarbon sectors expect volume of sales to be strengthening, with a widespread expectation of rising new orders.

Attributed to the pace of awarded contracts so far this year, the construction sector has shown the most optimistic outlook among all non-hydrocarbon sectors.

Despite the regional uncertainties, 65 percent of the companies in the non-hydrocarbon sector, and 68 percent in the hydrocarbon sector are not anticipating negative factors to impact their businesses in the 4Q 2013.

Reflecting improved optimism, the investment outlook for the non-hydrocarbon and hydrocarbon sectors remains steady with 52 percent and 55 percent of the respondents in each, respectively, have expansion plan.”

On the impact on the business community of the new labor policies, the survey revealed that more than half of the respondents (51 percent) perceive that the new labor policies will have a negative impact on the business, while the remaining 49 percent don’t see these as a challenge.

The main concerns of companies related to the labor policy include availability of skilled labor and increase in the cost of labor.

Other concerns include difficulty in finding cheap labor and impact on productivity of businesses.

This article was first published in the Saudi Gazette.