The highly uncertain global economic outlook in the second half of 2012 has impacted the Saudi business forecast for the third quarter of 2012.

The National Commercial Bank Saudi "Business Optimism Index for Q3 2012" released Tuesday showed that deteriorating conditions in the eurozone will have an even greater impact on trade and credit flows internationally, which will resultantly contribute to a further moderation in global growth.

The BOI survey revealed that Saudi Arabia’s hydrocarbon sector optimism has weakened in Q3 2012. The overall BOI composite score for the sector is at 23 points, 20 points lower than the score in Q2 2012, mainly due to a drop in selling prices expectations. The BOI for level of selling prices has dipped by 35 points to 8 in Q3 2012 from 43 in the previous quarter. A majority (72 percent) of the respondents anticipates no change in prices, 18 percent expect prices to rise further and a minor 10 percent expect a price decline in Q3 2012. Consequently, net profits expectations have also lowered for Q3, commensurate with which the corresponding BOI stands at 23, compared to 38 in Q2. The view on increasing workforce in the next quarter has remained largely steady, with the BOI value for number of employees witnessing a slight increase to 53 in Q3 from a value of 48 points in Q2.

The survey also showed that even though sentiments of Saudi business community have weakened in Q3 2012 compared to the previous quarter, overall, the outlook still remains positive. The composite index for the non-hydrocarbon sector stands at 37 compared to 52 in Q2. The Saudi economy’s performance has been exceptionally robust and the economy is expected to remain resilient in the current year despite the weak global economic scenario. The BOI survey further showed that despite a decline in the score for all six parameters for Q3, expectations still remain strong. The BOI for the volume of sales parameter stands at 39 in Q3 compared to 67 in Q2, while the BOI for the new orders parameter is recorded at 52 compared to 65 in Q2.

The BOI for level of selling prices stands at 15 points in Q3 2012, versus 24 in the last quarter. There is expectation of relative stability or a slight decline in the inflationary pressures in the coming period due to a decline in the world food prices, coupled with stability in domestic price levels. Profitability expectations have also weakened from the previous quarter.

The BOI for the net profits parameter is recorded at 37 in Q3 2012, against 54 in Q2. The BOI for number of employees remains almost steady, dropping marginally by 4 points from 48 in the last quarter. Respondents are slightly less optimistic with respect to inventories compared to Q2 2012; the BOI for level of stock stands at 29 in Q3 2012, down from 33 in the previous quarter.

The expectations toward the overall business environment in Saudi Arabia have improved in Q3 2012 compared to the previous quarter. Forty five percent of the respondents in the non-hydrocarbon sector have said that they do not expect any negative factors to influence their business operations in the third quarter of 2012, as compared to 33 percent in the second quarter of 2012. Around 30 percent of the respondents who have cited adverse business environment as a key concern, attribute factors such as the global economic downturn, euro region crisis and currency fluctuations to have an impact on their business operations in Q3 2012. While 11 percent of respondent businesses were found concerned about availability of skilled labor, another 3 percent reflected concerns about availability of finance.

Sixty two percent of the non-hydrocarbon companies have said that they would invest in business expansion in Q3 2012 compared to 40 percent in the previous quarter.

Commenting on the findings of the survey, Dr. Said Al-Shaikh, Senior Vice President and Group Chief Economist of the National Commercial Bank, said “as the signs of dynamism in global economic growth and the effects of long-term financing operations provided by ECB seem to be fading away, 30 percent of the firms surveyed in the Kingdom indicated that the business environment due the global economy will impact their business operations in the Q3 2012. Consequently, the Kingdom’s BOI for the non-hydrocarbon and hydrocarbon sectors have weakened in third quarter compared to the second quarter, falling by 15 points and 20 points, respectively. While the substantial drop in oil prices weighed heavily on the selling price parameter and in turn on the BOI of the hydrocarbon sector, the lower reading of volume of sales on expectations of weaker demand in the holiday season has contributed to the drop in the non-hydrocarbon sector’s BOI in the 3Q 2012.”

However, he noted that “despite weaker business sentiment relative to the previous quarter, 57 percent of the firms still anticipate an increase in their sales. Meanwhile, reflecting continued positive economic outlook, 62 percent of the non-hydrocarbon companies surveyed said that they would invest in business expansion in the third quarter compared to 40 percent in the second quarter of the current year.”

Commenting on the findings of the survey, Prashant Kumar, Senior Manager, Research & Advisory of Dun and Bradstreet South Asia Middle East Ltd, NCB’s partner in the survey, said “Saudi businessmen have expressed concerns regarding their business outlook in the third quarter of 2012. The BOI survey for Q3 2012 reveals lower optimism levels compared to those recorded in the previous quarter. The hydrocarbon index has dipped to 23 from 43 in Q2 mainly due to the selling price optimism which has plunged 30 points to 8 reflecting uncertainty for oil demand given fragile global recovery.”

Moreover, “the non-hydrocarbon index too has dropped to 37 from 52 in Q2 as all parameters have declined. Overall, although the optimism levels have lowered, a large proportion of businesses across all sectors still expect expansion of their businesses and new order activity. Businesses expecting a decline have cited a natural slowdown in business activity due to summer vacations and the holy month of Ramadan as primary reasons. 30 percent of the respondents in the non-hydrocarbon sector foresee factors such as the euro region debt debacle, uncertain and uneven global economic recovery, negative spillovers due to trade linkage disruptions, etc. as factors impacting their operations in Q3 2012. Reflective of the high infrastructure spending by the Saudi government, the construction sector is the most optimistic among all the business sectors surveyed,” he added.

The BOI survey also showed that the manufacturing sector outlook has weakened in Q3 2012 as five out of the six parameters recorded a lower score from the previous quarter. The composite BOI for Q3 2012 stands at 39 compared to 54 points in the previous quarter.

Moreover, the outlook for the global construction sector 2012 is looking slightly more pessimistic compared to 2011, as the developing economies responsible for much of the growth in the recent past are starting to slowdown, the survey noted.