Business & Money | Monday 23 May, 2016 5:20 am |

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, 2016. The survey reveals cautious optimism levels for firms in Saudi Arabia.

Hydrocarbon Sector

The current survey shows that the composite BOI for Saudi Arabia’s hydrocarbon sector has edged back into the positive territory, with a reading of 3 in Q2, 2016 against -12 in Q1, 2016. 48% of the oil & gas firms do not expect any hurdles to their business operations during Q2, 2016, which is comparable to the corresponding proportion of 35% last quarter. The top concerns of this sector include lower oil prices at 37%, while 7% are concerned about issues related to government policies, rules & regulations. 20% of the oil & gas firms intend to invest in business expansion in Q2, 2016, whereas 60% have indicated that they will not.

Non-hydrocarbon Sector

The non-hydrocarbon sector’s optimism has dropped to the second lowest level in the series. For Q2, 2016, the composite BOI stands at 21, compared to 28 last quarter and 43 for the second quarter of 2015. The y-o-y and q-o-q declines are the result of lower scores for all the parameters. Non-hydrocarbon sector respondents are less confident about the business environment for Q2, 2016 as they were in the last quarter; 39% of the companies expect no negative factors to pose as an obstacle to their business operations in Q2, 2016 compared to 52% in Q1, 2016. The impact of oil prices (14%), competition (12%), and issues related to government rules & regulations (10%) have been cited as the key hindrances for the current quarter. Additionally, 36% of the firms have said that they are likely to invest in business expansion activities, while 51% have indicated that they will not undertake such investments.

Sector-wise Analysis

The trade and hospitality sector’s business outlook for Q2, 2016 has moved sideways in comparison to the index for Q1, 2016; the composite BOI is at 32 in Q2, 2016 against 31 in Q1, 2016.  While the demand and profitability indices have improved on a quarterly basis, those for selling prices and hiring have deteriorated. Weaker expectations for Q2, 2016 are also reflected in the lower outlook for the business environment in Q2, 2016. 36% of the sector firms do not expect any negative factors to hinder business operations compared to 45% in the previous quarter. 40% of the sector firms plan to invest in business expansions in the current quarter compared to 50% that will not.

The composite BOI for the finance, real estate & business services sector has also dropped to the lowest level in the series. The composite BOI for Q2, 2016 stands at 24, decreasing 4 points on a quarterly basis and 24 points on an annual basis. The outlook with respect to the business environment is also dented with 49% of the firms in this sector indicating that they do not expect any hindrances to their business operations during Q2, 2016 compared to 53% in Q1, 2016. The business expansion outlook has weakened; 33% of the respondents expect to undertake such investments in Q2, 2016, down from 47% in Q1, 2016.

The manufacturing sector’s forecast has tracked sideways, with the composite BOI at 22 in Q2, 2016, which is the same level as in Q1, 2016. However, on a y-o-y basis, the outlook has lowered significantly. On a quarterly basis, the demand, selling prices and profitability parameters have posted modest upticks, but the hiring index has softened. 27% of the manufacturing firms do not expect to face any hindrances to their business operations in Q2, 2016 compared to 53% in Q1, 2016. 37% of the firms hope to invest in business expansion in Q2, 2016 versus 49% that have indicated that they will not undertake such investments.

The construction sector’s outlook has dropped to its lowest level in the series. The composite BOI stands at 11 in Q2, 2016, down from 26 in Q1, 2016 and 44 in Q2, 2015. A drop in the number of government and private sector projects and low oil prices has negatively impacted the sector. The business environment outlook has retreated compared to the last quarter as 41% of the firms do not expect any negative factors to impact operations in Q2, 2016 compared to 43% in Q1, 2016. 35% of the firms intend to invest in business expansion in Q2, 2016, against 53% of the firms that will not.

The composite BOI for the transport, storage & communications sector has dropped to its lowest level in the series, registering a reading of 7 in Q2, 2016. On a quarterly basis, the indices for volumes, new orders, net profits and hiring have moderated significantly, but that for selling prices has improved marginally. The business environment optimism has weakened from the level observed in Q1, 2016; 48% of the firms in this sector do not expect to get impacted by any negative factors during Q2, 2016 compared to 51% in the previous quarter. 34% of the respondents intend to undertake investments in business expansion in Q2, 2016 versus 56% that will not invest in such activities.

SMEs are modestly more optimistic than large companies in Q2, 2016, with their respective composite scores at 22 and 19, respectivly. Both groups continue to have a similar outlook with respect to the business environment; 38% of SMEs and 39% of large companies do not anticipate any challenges impacting operations in Q2, 2016. Competition and impact of low oil prices are leading concerns for both types of businesses.

Commenting on the findings of the latest survey, Assad Shaikh, Associate Director - Research & Advisory Services, Dun and Bradstreet South Asia Middle East Ltd. said:

“Sentiments remain mixed in Saudi Arabia. The BOI score for the hydrocarbon sector is recorded in the positive territory at 3 in Q2, 2016, up from last quarter’s all-time low of -12. On the other hand, the survey revealed that the composite BOI for the non-hydrocarbon sector dipped to the second lowest level in the series to 21 in Q2, 2016 down from 28 in Q1, 2016. 

With reference to the business environment, the optimism has strengthened as 48% of the oil & gas firms have indicated that they do not expect any factors to impact their operations, while that for the non-hydrocarbon sector has weakened with the proportion at 39%. 

Commenting on the findings of the survey, Ms. Sharihan Almanzalwai, Associated Economist of the National Commercial Bank, said “On anticipation of further decline in US oil production, which likely will impact the current level of inventories, the outlook for the oil hydrocarbon sector has improved. Accordingly, the level of selling prices increased from -25 points last quarter to 0 in Q2,2016. Moreover, the net profits parameter recorded an increase from -7 points to 5 points in the current quarter. as a result the index for the hydrocarbon sector improved to stand at 3 points in Q2,2016 compared to -12 points in Q1,2016. While 48% of the participants don’t expect any negative factors to impact their businesses in Q2,2016 against 35% in Q1,2016, suggesting improvement in the business environment, hydrocarbon firms are less optimistic with respect to investment, as 20% of the firms indicated expansion plans in Q2,2016 compared to 33% in Q1,2016.

Despite the decline in oil revenues, which has already led the government to cut spending, the government will continue to spend on social and physical infrastructure. However,  the level of spending will inevitably be rationalized over the medium term. Accordingly, the BOI for the non-hydrocarbon sector has dropped from 28 points in Q1,2016 to 21 points in Q2,2016. The outlook for the business environment  is less optimistic in the Q2, 2016, as 39% of the companies expect no negative factors to impact their business operations in Q2, 2016 compared to 52% in Q1, 2016. With regards to investment in business expansion in the non-hydrocarbon sector, it has also weakened, as 36% of the firms intend to expand in the current quarter versus 44% in the previous quarter.”