Real estate prices worry companies across Saudi Arabia 

(MENAFN - Arab News) The Q3 survey of SABB (The Saudi British Bank) reveals that business confidence in the Kingdom remains strong — and indeed, 89 percent of respondents expect even stronger growth over the next two quarters.

From SABB survey of 537 companies across diverse industry sectors:

• 89 percent of respondents expect improved performance from their businesses in Q4 of this year and Q1 of 2009, an increase of 1 percent over Q2 results

• Seventy-four percent report a rise in production capacity, compared to 66 percent in Q2.

Overall, the business environment is strong with a continuing upward momentum, while the economy is expected to grow in line with the boom that is unfolding.

As in SABB's Q2 survey, not a single respondent predicted weak business growth for Q4 and Q1, which is proof of the "good times" businesses anticipate.

But the good times are accompanied by rising costs, despite the boom, which are bringing down the overall SABB Index figure.

Our latest findings reveal that business confidence is down to 100.2 from 105.4 — a 5.2 percent decline. The survey attributes this decline to a host of issues, including:

A — Mounting inflationary pressures on the cost of doing business.

B — Labor shortages which continue to hinder business expansion.

C — Tighter funding criteria due to the "credit crunch".

D — The rising cost of real estate.

Oil prices

Fifty-four percent of respondents expect the oil price to climb above $140 per barrel. Sixty-seven percent of those surveyed in the previous quarter correctly anticipated that the price would continue to climb above $105 per barrel.

None of the respondents now expect the oil price to fall below $110 per barrel, a threshold SABB has raised from $90 in our Q1 survey.

Only 12 percent (down from 15 percent in Q2) expect oil prices to fall. Surprisingly, some 34 percent of respondents expect oil to remain around $140 per barrel — a much higher response than the 17 percent received in Q2.

The near doubling in oil prices over the past year, together with SABB's preliminary forecast for average price (WTI) for this year of $111 per barrel, is a huge boon for Saudi Arabia's oil export revenues.

SABB's mid-year estimate for 2008 oil export revenues now surpasses $330 billion, a 61 percent increase over 2007, and a higher oil price average will only lead to even higher export and government revenues.

Inflation

Inflation is one of the key factors denting business confidence.

Price rises are now a concern for 61 percent of businesses surveyed, compared to under 50 percent in Q1. Of those companies, 71 percent expect inflation to negatively impact on their businesses, against 64 percent in Q1. Clearly, inflation continues to have a much broader effect on the economy — and our average inflation forecast for 2008, as the inflation build-up continues, now stands at 9.3 percent (from our previous forecast of 7.9 percent).

Although the various subsidies announced will have an impact in terms of cushioning the effects, prices will continue their upward trend — with rent and food price increases continuing to create inflationary pressures.

Some 77 percent of respondents viewed the cement ban as positive and, over the past few weeks, cement prices have started to show a noticeable price correction.

Also, 76 percent of respondents expect custom duty reductions to have an impact on the cost of imports over the next two quarters.

Saudi riyal

Currency matters are an issue for Saudi businesses; and the survey responses continue to support the view that a revaluation is not imminent.

With 17 percent of respondents (a 5 percent increase from our Q2 findings) expecting the riyal to be revalued in the next two quarters, market rumors and speculation should remain subdued for the foreseeable future.

Real estate

Rising real estate prices continue to worry companies across the Kingdom. In the survey, 68 percent of respondents (56 percent in Q1 and 68 percent in Q2) said they expect the cost of real estate to have a negative impact on their businesses in the next two quarters.

Labor market

The availability of human resources is an additional concern for businesses, as labor supply constraints can limit expansion in the non-oil private sector. Among our survey respondents, 49 percent (42 percent in Q2) reported that their organizations do not have all the required staff and another 20 percent (28 percent in Q2) expect to be very insufficiently staffed in the next few quarters.

Only 22 percent (30 percent in Q2) regard their businesses as adequately staffed. But labor demand is still outstripping supply, which could have an effect in productivity gains and non-oil private-sector growth.

Borrowing and rates

Businesses are less optimistic about the lending attitude of banks in the Kingdom. Only 38 percent of respondents expect bank lending to be "positive" this quarter, down from 71 percent in Q2, (2 percent "highly positive" and 36 percent "accommodating").

The majority of respondents (54 percent) anticipate that interest rates will stay the same, against 26 percent in Q2, while 28 percent expect them to rise and only 18 percent anticipate a fall of between 10 and 20 basis points.

Investment

Because of its subjective nature, the question of investment prospects was not included in SABB's statistical calculations for the index, but responses in this area do throw light on how businesses view market opportunities.

Real estate will continue to be the preferred investment option in Saudi Arabia over the next two quarters, followed by investment in local equities. Fifty percent of respondents showed a preference for real estate (47 percent in Q2) and 41 percent for equities (44 percent in Q2).