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Highlights:
• Saudi Arabia's non-hydrocarbon sector displays a modestly weaker outlook compared to the first quarter with the composite BOI at 43, weighed down by lower optimism for selling prices and profitability
• At 13 points, the hydrocarbon sector's composite BOI has dropped to the lowest level since Q2, 2009 primarily due to weaker expectations for selling prices
• The finance, real estate & business services sub-sector is most optimistic, while the transport sector has posted its weakest outlook
• Fluctuation in oil prices is the foremost concern for hydrocarbon sector firms; availability/cost of skilled labor and Government rules & regulations are the key obstacles for non-hydrocarbon sector firms
• The investment outlook has improved modestly for both hydrocarbon and non-hydrocarbon sectors
Riyadh - Dun & Bradstreet South Asia Middle East Ltd (D&B) in association with the National Commercial Bank released the D&B Business Optimism Index (BOI) survey for Saudi Arabia for Q2, 2015. The BOI survey highlights lower optimism levels of both the hydrocarbon and non-hydrocarbon sectors in Saudi Arabia.
Background to the survey
Oil prices appear to have stabilized in the US$ 45-55 per barrel range, down from last June's peak of US$ 115 per barrel. The sharpness with which oil benchmarks have tumbled represents an adjustment to short-term demand and supply expectations as well as fading geo-political threats. Due in part to the sluggish path of global economic growth, the IEA has sharply revised down its forecast for global oil demand for both 2014 and 2015. In addition to this demand weakness, abundance of supply is also weighing on prices. Further, currency movements are also having an effect. The expectation of a rise in US interest rate during 2015, is leading to the Dollar strengthening against other currencies. This trend is being amplified as the weakness in other key regions of the global economy becomes more apparent. Analysts expect more of the same underlying trends in the second quarter of 2015, with the ongoing increase in US oil inventories despite a steep fall in the number of uneconomical US rigs since last October. Decline in the US rig count has not yet dented North American output growth. However a gradual increase in oil prices is expected starting the third quarter as demand starts to recover and oil production starts to decline.
OPEC's decision to maintain its output level last year has played a part in the most recent oil price slump, as the Kingdom insisted onretaining its market share against competing sources of crude. In Q4, 2014 Saudi Arabia produced 9.64 million bpd of crude, and maintained this level in the beginning of 2015, producing 9.68 million bpd in January 2015 and 9.64 million bpd in February 2015. Saudi Arabia is ramping up the number of machines drilling for oil and gas despite the sharp fall in the price of crude so as to preserve its spare capacity.
Commenting on the findings of the survey Mrs. Sharihan AL-Manzalawi, Economist of the National Commercial Bank, said;
"The continued volatility in oil markets since the beginning of the year have weighed negatively on the optimism in both the hydrocarbon and anon-hydrocarbon sectors of the second quarter of 2015. Accordingly, the hydrocarbon's BOI dropped to 13 points, its lowest level since 2Q 2009. Meanwhile, the non-hydrocarbon's BOI declined modestly to 43 points, as the government counter-cyclical fiscal policy, supported by its huge reserves, apparently, offset the expected negative impacts due to the sharp fall in oil prices.
Moreover, attributed to the moderating pace of the awarded construction contracts so far this year, the construction sector's BOI has declined by only 5 points to 44 points in the 2Q 2015. Also, despite the ongoing war in Yemen and regional uncertainties, 50% of the companies surveyed in the hydrocarbon sector, and 52% of those in the hydrocarbon sector are not anticipating negative factors to impact their businesses in the 2Q 2015. Reflecting improved confidence over the last quarter in the resilience of the Kingdom's economy 49% of the companies surveyed in the non-hydrocarbon sector still plan to invest in expansionary activities, with the sentiment in the finance, real estate, and business services sector taking the lead, as 56% of the respondents in this sector plan to undertake expansion activities".
Hydrocarbon sector
The outlook for Saudi Arabia' hydrocarbon sector for Q1, 2015 has dropped to the lowest level since the second quarter of 2009. The composite BOI stands at 13 in Q2, 2015, down from 16 in Q1, 2015 and 49 in Q2, 2014. The primary reason for this decline is the weak forecast for selling prices. While 25% of the respondents anticipate an increase in their selling prices, another 25% expect a decrease due to competition and the recent drop in low oil prices, resulting in a BOI of 0. In the previous quarter the BOI for selling prices was at 8 and last year (Q2, 2014) it stood at 43. Despite the expectation of weak selling prices, oil & gas companies are modestly more optimistic about their profitability and hiring outlook. The BOI for net profits is at 25 compared to 22 in the previous quarter. The BOI for number of employees has shown a marginal improvement from 25 in Q1, 2015 to 27 in Q2, 2015, but has declined from 50 in Q2, 2014.
Non-hydrocarbon Sector
The current survey shows that the outlook of the non-hydrocarbon sector has moderated only marginally compared to the last quarter as well as the same quarter a year ago. The composite BOI has slipped to 43 in Q2, 2015 from 48 in Q1, 2015 and 50 in Q2, 2014. A drop in optimism for selling prices and profitability is responsible for this weak forecast. The index for selling prices has deteriorated from 27 in Q1, 2015 to 14 in Q2, 2015 while that for net profits has weakened from 57 in Q1, 2015 to 49 in Q2, 2015. The parameter for volume of sales has shown a 5 points decline to 53 in Q2, 2015, while the BOI for new orders is holding steady at 55. The non-hydrocarbon sector has maintained its hiring outlook, with the BOI at 42 in Q2, 2015 against 41 in Q1, 2015.
Sector-wise Analysis
The composite BOI for the finance, real estate & business services sector remains at the same level as a year ago at 48, whereas the index has modestly declined by 4 points on a q-o-q basis. Mirroring the trend in the overall economy, most parameters have recorded losses, while the BOI for new orders has gained. The business environment outlook for this sector remains steady; the proportion of firms that do not anticipate any obstacles to their business operations remains at 59% in Q2, 2015. The business expansion outlook is also steady with 56% of the respondents planning to invest in business expansion in Q2, 2015, versus 55% in Q1, 2015.
The manufacturing sector's outlook for Q2, 2015 is modestly lower than that observed in the previous quarter and in Q2, 2014 mainly due to a much weaker forecast for selling prices. Consistent with the moderation in demand and price parameters, profitability has alsoweakened, while the employment outlook has strengthened sharply in Q2, 2015. The manufacturing sector's business environment outlook is less bullish compared to the previous quarter; 46% of the firms have indicated that they will not face any hindrances to their business operations in Q2, 2015 compared to 59% in Q1, 2015. The proportion of firms intending to invest in business expansion in Q2, 2015 has increased to 46% versus 44% in the previous quarter.
The outlook for the construction sector has moderated and stands at the lowest level since Q3, 2012; the BOI has decreased from 49 in Q1, 2015 and Q2, 2014 to 44 in Q2, 2015. Although the demand parameters are at the same level as in Q1, 2015, the indices for selling prices, profitability and hiring are lower. The business environment outlook has also retreated compared to last quarter; 47% of the construction companies have indicated no obstacles to their business in Q2, 2015 compared to 59% last quarter. Business expansion plans have become bullish with 51% of the firms expecting to undertake such investments during Q2, 2015 compared to 37% in Q1, 2015.
The composite BOI for the trade and hospitality sector is weaker than the index last quarter as well as last year - 36 in Q2, 2015 versus 44 in Q1, 2015 and 53 in Q2, 2014. Most parameters have pulled back while the employment outlook is steady. Overall weaker expectations are also reflected in the lower outlook for business environment in Q2, 2015. While 57% of the firms indicated that they did not face any hindrances to their operations in Q1, 2015, this proportion has dropped to 53% in Q2, 2015. 44% of the firms in the trade & hospitality sector plan to invest in business expansion in Q2, 2015 compared to 49% in Q1, 2015.
The composite BOI for the transport sector has dropped to a series low of 32 for Q2, 2015, which is 17 points lower than last year and 3 points less than the index value in the last quarter. The BOI for volume of sales has strengthened while the other parameters ended lower. The outlook with respect to the business environment is also dented; 48% of the respondents have indicated that they do not anticipate any hindrances to their business operations during Q2, 2015 compared to 63% in Q1, 2015. Business expansion plans are steady; 50% of the companies intend such investments, which is the same proportion as in Q1, 2015.
Large companies are more bullish than the SMEs about the second quarter with composite BOIs of 47 and 38 respectively. Large companies have a stronger outlook for volume of sales, new orders, profitability and hiring, while both groups have a similar forecast with respect to selling prices.SMEs are more confident about the business environment with 53% of them indicating no obstacles to operations during Q2, 2015 compared to 47% of large companies. Large companies are more optimistic of their business expansion plans than SMEs, with the corresponding proportion of 54% and 45% respectively.
Factors Impacting Business Operations
Sentiments with reference to the business environment in the hydrocarbon sector is cautious; 50% of the sector respondents have cited no negative factors impacting their operations compared to 65% in the previous quarter. Concerns highlighted by firms in Q2, 2015 include: fluctuating oil prices (29%), competition (12%) and Government rules & regulations (5%).
The non-hydrocarbon sector participants have highlighted weaker sentiments for the business environment for Q2, 2015; a slightly lower proportion (52%) of the respondents compared to last quarter's 59% in the non-hydrocarbon sector have cited no negative factors impacting business operations. Government rules & regulations (11%), availability/cost of skilled labor (11%) and fluctuating oil prices (8%) are the other concerns impacting businesses in Q2, 2015.
There is a slight improvement in the proportion of hydrocarbon sector firms intending to invest in business expansion plans - 40% this quarter compared to 38% in Q1, 2015. On the other hand, 35% are cautious and will not make any investments in business expansion activities this quarter.
In terms of business expansion plans of the non-hydrocarbon sector, a marginally higher, 49% of the firms will invest in expansionary activities compared to 47% in Q1, 2015. Similar to last quarter, the finance, real estate & business services sector continues to be more optimistic in this regard - 56% in Q2, 2015 compared to 55% in the previous quarter.
Commenting on the findings of the latest survey Prashant Kumar, Associate Director, Dun and Bradstreet South Asia Middle East Ltd. said:
"Sentiments among Saudi Arabia's business community in the hydrocarbon and non-hydrocarbon sectors have moderated as the BOIs have slipped this quarter. The hydrocarbon sector's composite BOI has dropped to the lowest level since Q2, 2009 due to weaker expectations for selling prices. Firms in the hydrocarbon sector expect a softer business environment with 50% expecting no obstacles to their business operations during Q2, 2015 compared to 65% in Q1, 2015. Fluctuating oil prices is the main concern of this sector in this quarter.
Meanwhile, Saudi Arabia's non-hydrocarbon sector's score stands at 43, weighed down by lower optimism for selling prices and profitability. In line with the lower optimism, non-hydrocarbon sector respondents are not as confident about the business environment for Q2, 2015 as they were last quarter; 52% of the companies do not expect to face any hindrances to their operations compared to 59% during Q1, 2015. Issues related to Government regulations and availability/cost of skilled laborhave emerged as leading concerns for 11% of the respondents in each case. The finance, real estate & business services sector continues to hold the strongest optimism for Q2, 2015.
Sentiments in terms of business expansion plans have slightly improved in the hydrocarbon sector; 40% this quarter compared to 38% in Q1, 2015. In the non-hydrocarbon sector, a marginally higher, 49% of the firms will invest in expansionary activities compared to 47% in Q1, 2015."
-Ends-
For further information:
National Commercial Bank
Ms. Sharihan AlManzalawi
Economist
Tel: +9661-2 6462540
Email: s.almanzalawi@alahli.com
© Press Release 2015
