Global Arab Network | Confidence Rising - 11.1% Increase in Saudi Arabia Stock Exchange

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Confidence Rising - 11.1% Increase in Saudi Arabia Stock Exchange

Wednesday, 05 May 2010 14:26

As finance departments across the Kingdom of Saudi Arabia file their first-quarter figures, the Saudi economy appears to have had a positive start to the year. Confidence among local executives is improving, while the stock market posted strong gains that look set to lure back some of the investors that have been waiting on the sidelines.

According to Banque Saudi Fransi's (BSF) business confidence survey, executives are more optimistic about the Saudi economy in 2010. The BSF Business Confidence Index rose to 100.7 in the second quarter of 2010 compared to 99.4 in the first quarter of the year. The decision-makers surveyed in the index expect a favourable operating environment over the next two quarters on the back of firm oil prices, strong economic growth and banks willing to extend credit.

The changing sentiment towards the banking sector was one of the most significant and important findings in the report. Nearly 60% of the 781 company managers participating in the survey said that the lending attitude of banks had returned to "normal" or "improved", a significant increase from the 41% that felt that way in the Q1 survey. Nonetheless, 41.5% of respondents still went on to describe the banks' lending attitude as "not good".

Additionally, the report found that a majority of business leaders are looking to bolster their inventories and raise production capacity, assuming stronger revenues are on the horizon. Some caution still remains however, with almost half of respondents saying they are keeping production capacity at current levels.

Business leaders are also regaining confidence in the stock market, with 41.1% ranking equities above real estate, bonds or cash when asked which single asset class would provide the best returns during the remainder of the year, compared to 21% and 12.7% who gave the same answer in the Q1 2010 and Q4 2009 surveys, respectively.

This growing confidence is based on the performance of the Tadawul, Saudi Arabia's stock exchange, in the first three months of the year. According to the Tadawul Q1 2010 Statistical Report, the Tadawul All Shares Index (TASI) rose by 679.25 points, or 11.1% year-to-date, in the first three months of the year. Total equity market capitalisation at the end of Q1 2010 reached SR1.34trn ($360bn), an increase of 52.1% over the same period of the previous year.

The market also saw five initial public offerings (IPOs) in the first quarter, the majority of which were from the insurance industry as companies continued to list publicly in order to comply with Saudi Arabian Monetary Agency (SAMA) regulations governing the sector. The five companies issuing IPOs were Herfy Food Services, Al Sorayai Trading and Industrial Group, Solidarity Saudi Takaful, Amana Cooperative Insurance, and Wataniya Insurance. Gulf General Cooperative Insurance and Buruj Cooperative Insurance were also listed during the first quarter.

The Tadawul also continued its push to introduce new products and services to the local market by announcing the listing and trading of the Falcon Saudi Equity exchange traded funds (ETFs). Non-resident foreign investors are allowed to trade ETFs, so this is good news for those outside the Kingdom looking to gain exposure to the local economy.

Although inflation has moderated in the Kingdom since hitting its peak of 11.1% in mid-2008, to a more welcome 5%, the possibility of further inflationary pressures remains a concern. According to Samba Financial Group's "Inflation in Saudi Arabia: Drivers, Trends, and Outlook" report, the general drivers for Saudi inflation are trading partners' inflation, food prices and domestic rents.

Inflation among the Kingdom's key trading partners is not a major concern due to excess global economic capacity and depressed unit labour costs. The outlook for food prices is similarly not worrisome as ample stocks of key staples, like wheat, rice and sugar, are keeping prices stable. The report predicts an increase in rental price inflation, but this could be moderated by the imminent implementation of the mortgage law, which would redirect investment away from high-end commercial and residential real estate towards lower- and mid-level housing.

Overall, Samba expects inflation to stabilise at around 5% over the next three years. This is high by historical standards, but is well within reasonable bounds for a rapidly developing market. This prediction is in line with IMF expectations for consumer price increases of 5.2% in 2010 and 5% in 2011.

Although lending and inflation remain a source of concern in the background, the Saudi economy has done well in the first three months of the year and the signs point to a continuation of that performance. As confidence and expectations rise among executives, the economy looks poised to deliver.

Global Arab Network

This article is published in partnership with Oxford Business Group

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