- KSA’s oil & gas sector has displayed a bearish outlook for Q316 and the non-hydrocarbon sector has maintained its forecast for Q316
- The manufacturing sector is the most optimistic for Q316
- A third (31%) of non-hydrocarbon firms expect to invest in business expansion; for the hydrocarbon sector, the corresponding proportion is 30%
Dun & Bradstreet South Asia Middle East (D&B), in association with the National Commercial Bank released the D&B Business Optimism Index (BOI) survey for KSA for Q316. The survey reveals mixed sentiments for firms in KSA.
Dr Said Al-Shaikh, Group Chief Economist, NCB, said that despite some recovery in oil prices towards the end of the second quarter, raising to the mid-US$40 to US$50 a barrel range, the hydrocarbon sector BOI of Q316 slipped back into negative territory at -2 points after recording 3 points in Q116. "The negative momentum impacted business outlook, as only 38% of the participants in the survey expect no hindrance to their business," he said. "Looking beyond hydrocarbon, the BOI of the non-hydrocarbon has maintained similar expectations to the previous quarter at 21 points."
Dr Said Al-Shaikh, Group Chief Economist, NCB, said that despite some recovery in oil prices towards the end of the second quarter, raising to the mid-US$40 to US$50 a barrel range, the hydrocarbon sector BOI of Q316 slipped back into negative territory at -2 points after recording 3 points in Q116. "The negative momentum impacted business outlook, as only 38% of the participants in the survey expect no hindrance to their business," he said. "Looking beyond hydrocarbon, the BOI of the non-hydrocarbon has maintained similar expectations to the previous quarter at 21 points."
More than half (56%) of the participants were aware of the national Vision 2030 and of the National Transformation Program (NTP) 2020, which is part of Vision 2030. Vision 2030 is a blueprint for excellence grounded in KSA's place as the heart of the Arab and Islamic worlds; a drive to be a global investment powerhouse, and to leverage on the country's strategic location to become a global hub connecting Asia, Europe and Africa.
The Vision 2030 and NTP 2020 seems to have brought some optimism, thus preventing the BOI of the non-hydrocarbon sector from further deterioration, Dr Al-Shaikh added. He said, "Moreover, a sharp fall of contracts awards witnessed over the first half of 2016, recording approximately SR48 billion, not only impacted the construction sector BOI with a reading at 11 points and 12 points in Q216 and Q316, but other sectors were also impacted with varying degrees. In turn, the Q316 BOI for trade and hospitality dropped sharply to 18 points from 32 points in Q216. Reflecting the positive impact of Vision 2030 and NTP 2020, approximately 30% of each of the non-hydrocarbon firms participating in the survey indicated their expectation to invest in expansion in Q316."
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| Source: NCB. Dr Said Al-Shaikh, Group Chief Economist, NCB, speaking during the launch of the results. |
Hydrocarbon sector
The survey for Q316 reveals a bearish outlook for Saudi Arabia's oil & gas sector, with the composite BOI slipping into negative territory in Q316 to -2 from 3 in Q216. With respect to the business environment 38% of the firms do not expect to face any obstacles in their operations, while concerns about the adverse impact of low crude prices have dominated sentiments as 43% of the firms think that this factor might prove to be a hindrance. Thirty percent of the oil & gas companies have indicated plans to invest in business expansion in comparison to 55% which said they will not undertake such moves.
Non-hydrocarbon sector
Saudi Arabia's non-hydrocarbon sector has maintained its forecast for Q316 at the previous quarter's level, with the composite BOI staying steady at 21. Regarding the business environment in Saudi Arabia, firms are more upbeat about the third quarter than they were for Q216: 51% expect that no negative factors will hurt their businesses in Q316 versus a corresponding 39% in Q216. Business sentiment is most dented by low oil prices (13% have cited it as a key hindrance), issues related to government rules & regulations (13%) and competition (7%). Further, 31% of the firms intend to invest in business expansion, while 52% have indicated that they will not.
Sector analysis
The manufacturing sector's optimism outlook has bounced up from the series low seen in the first and second quarter of 2016; the composite BOI has improved to 27 in Q316 from 22 in Q116 and Q216. The demand, hiring and net profits BOIs have strengthened on a quarterly basis as businesses expect new projects from new clients and an overall increase in demand. Additionally, the business scenario has improved with 59% of them not expecting any obstacles to their operations in Q316 compared to 27% in Q216. A third (31%) of the manufacturing companies intend to invest in business expansion in Q316 against 54% that have indicated that they will not.
The outlook for the finance, real estate & business services sector has reached a new low; the composite BOI slipped from 24 in Q216 to 23 in Q316. While the BOI for volume of sales has edged up on a quarterly basis, the indices for the remaining parameters have turned lower. Nearly half (48%) of the firms in this sector have said that they do not expect any negative factors to adversely impact them during Q316. Additionally, 34% of the respondents expect to undertake investments in business expansion, compared to 45% who will not.
The trade and hospitality sector's forecast for Q316 is at the lowest level recorded; the composite BOI has dropped to 18 from 32 in Q216. All five parameters comprising the composite index have registered declines. Even though the composite BOI has dropped, business environment expectations have improved; 53% of the firms do not expect any hurdles in Q316 compared to 36% in Q216. A third (31%) intend to undertake investment in business expansion in Q316, while 38% will not.
The composite BOI for the construction sector has edged up by a single point from 11 in Q216 to 12 in Q316. The outlook for the construction sector remains weak as crude oil prices continue to remain low, which has suppressed new projects. However, the forecast for the business environment is stable: 40% of the construction companies do not anticipate any hurdles in Q316 compared to a corresponding 41% in Q216. A quarter (26%) of the firms in the construction sector intend to undertake investment in business expansion in Q316 (66% will not take up these plans).
The transportation, storage & communication sector's forecast in Q316 has increased from 7 in Q2, 2016 to 14 in Q316. On a quarterly basis the indices for volumes, new orders, net profits and hiring have strengthened, but that for selling prices has worsened. Half (52%) of the firms in this sector do not expect any obstacles during Q316 (48% in Q216). A third of the respondents hope to undertake investments in business expansion in Q316 versus 60% that do not intend to undertake such plans.
The current survey shows that small and medium sized enterprises (SMEs) have a modestly brighter forecast than the large companies, with composite BOIs of 22 and 18 respectively. SMEs are more optimistic than large companies on all parameters. SMEs hold a modestly firmer outlook with respect to the business environment with 53% of them compared to 49% of the large companies expecting no obstacles to their operations in the coming quarter. For both groups, the leading concerns are the impact of low crude prices and government policies, rules & regulations.
Assad Shaikh, Associate Director - Research & Advisory Services, Dun and Bradstreet South Asia Middle East said: "Sentiments in the region are subdued with respect to firms in the kingdom's hydrocarbon sector. The BOI score for this sector is recorded at -2 in Q3, 2016 from 3 in the previous quarter, weighed down by lower scores for selling prices and profitability. On the other hand, the current survey revealed that the composite BOI for the non-hydrocarbon sector is firm at the previous quarter's level of 21.
"The impact of low oil prices has dented the optimism with respect to the business environment which has turned lower for oil & gas firms as 38% have indicated that they do not expect any factors to impact their operations. The proportion stood at 51% for the non-hydrocarbon sector.
"With regard to investment in business expansion in Q316, sentiments of both groups are comparable (30% intend to invest in such plans for hydrocarbon firms versus 31% for non-hydrocarbon firms)."
The D&B Business Optimism Index is a measure of the pulse of the business community, serving as a benchmark for investors and policy makers. As the latest addition to D&B's global series, the Business Optimism Index on Saudi Arabia, done in association with The National Commercial Bank, is issued on a quarterly basis. The next Business Optimism Index on Saudi Arabia will be released in October 2016.
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