Business sentiments muted amid concerns about the pace and sustainability of economic recovery process

• The Q4 Business Optimism Index for the hydrocarbon sector has dropped by 3 points to 41 from 44 in Q3 mainly due to a weak profitability outlook
• The Business Optimism Index for the non-hydrocarbon sector has gained 3 points to 39 in Q4 from 36 in Q3. The main drivers being strong demand outlook as reflected by gains in the Sales, Orders and Stock parameters.
• The Transport & Communications sector demonstrates the most optimistic outlook of all the sectors for Q4. Significantly raised demand and Price parameters leading to growth in profitability expectations
• The Finance, Real Estate and Business Services sector recorded a decline of 10 points to 27 in Q4. Despite recent good stock market performance and positive reports on the real estate market the business community clearly remains concerned about the short term outlook

Commenting on the findings of the survey Phil Strange, CFO of Dun and Bradstreet South Asia Middle East Ltd: " Business sentiment in Kuwait remains strong with the hydrocarbon sector recording a BOI of 41 and the non-hydrocarbon sector 39. The strength of these indices is supported by the oil sector and government spending somewhat insulating Kuwait from the mixed signals of economic recovery being seen in the rest of the world."

The global economic recovery is moving into a more mature phase where the effect of various aids such as fiscal stimulus fades and gains in GDP will increasingly rely on consumption and private sector investment. However, the pace of recovery has seen diverse patterns in different economies. The world economy is facing challenges such as stubbornly high unemployment, weak private sector demand and de-leveraging, unsustainable growth rates in some regions, challenges due to high sovereign debt burdens, concerns in the US housing market and possible further quantitative easing (QEII) which going forwards may challenge the growth momentum. Business sentiments in the hydrocarbon sector have witnessed moderation while that for the non hydrocarbon sector has improved marginally. Economic growth which is supported by government spending is expected to gather pace in the future as demand picks up. As per data from the Central Bank of Kuwait the nation’s GDP dropped 21.2% in 2009 after rising by 22.7% in 2008. Despite a slowdown in the economic activity Kuwait posted a budget surplus of USD 22.4 billion in 2008-2009. In order to give a fresh impetus to growth and fuel expansion the Kuwaiti government has passed state spending of USD 56.07 billion for the fiscal year 2010-11.

Hydrocarbon Sector
The BOI survey reveals that uncertainty concerning the global recovery process has impacted business sentiments in Kuwait for Q4 2010. The composite BOI for the hydrocarbon sector has dropped to 41 in Q4 from 44 in Q3. A fall in the profitability index is the main factor for the decline; the Net Profits parameter declining by 10 points to 50 in Q4. The Selling Prices parameter has, however, remains stable at 45 for Q4 indicating the business community anticipates oil prices staying at around today's level.

Non Hydrocarbon sector
The composite BOI for the non-hydrocarbon sector has gained by 3 points to 39 in Q4 versus Q3. The gain was mainly supported by stronger demand outlook reflected by improvement in the Sales, New Orders and Stock indices; the BOI for the Volume of Sales stands at 55 for Q4 as compared to 46 in Q3; while that for the New Orders parameter stands at 54 for Q4 as against 49 in Q3. Strong Sales and New Orders indices have boosted profitability expectations; the BOI for Net Profits standing at 43 for Q4 compared to 40 in Q3. Similarly, at 37, the BOI for the Level of Stock parameter has witnessed a gain of 18 points in Q4.

Factors impacting business
Overall raw material cost and availability of finance are cited as the two major factors impacting business operations in Q4. 41% of the respondents have expressed concerns about raw material cost while 31% are concerned about availability of finance (down from 41% in Q3). 15% have polled for availability of skilled labor as a challenge while 13% are concerned about rises in property prices or rents.

The hydrocarbon sector appears to be divided in their views about factors impacting business operations. Respondents scored 28% for each of Project delays, Discovery & development costs and Transport costs (up from 3% in Q3) as overriding concerns in Q4 2010.

Investment in business expansion
Respondents in the non hydrocarbon sector hold a diverse opinion about investment in business expansion in Q4 2010. 33% of the respondents plan investments in business expansion while an equal number of respondents are unsure about business expansion plans. 34% of the respondents have blocked investments in business expansion in the current quarter (which on a positive note is down from 55% in the previous quarter).

Muthanna Investment Company has commented on the findings of the survey, "Oil price stability since 1Q-2010 and approval of various backlog government projects, specially the 5-year Development Plan amounting USD 105 billion, have jointly provided much needed impetus to overall business sentiments in the Kuwaiti economy. Despite of mixed economic signals erupting from the current global scenario, the Kuwaiti economy is robust footing on the path of progress as measured by various BOI parameters. Kuwait's economic lifeline; "Oil" is expected to maintain its current fair range of USD 70-80 bbl in the upcoming quarter which is certainly providing a cushion for the future government spending. The local market is intensifying for past two months, anticipating a certain positive growth on various economic fronts. However, despite of all these affirmative developments, we must not forget that persisting high unemployment, recently erupted currency flag war among developed nations to boost their exports, surging debt and slowing GDP of various developed nations still remain real challenges for the world and may dampen the local growth".

The D&B Business Optimism Index is widely recognized as a key measure of the pulse of the business community, serving as a reliable benchmark for investors, policy makers and other observers of the economy worldwide. Published on a quarterly basis, the Business Optimism Index for Kuwait, done in association with Muthanna Investment Company is the latest addition to D&B's global series of business sentiment surveys. The next Business Optimism Index for Kuwait will be released in January 2011.

8th August 2010
Business Optimism Index (BOI)

Business optimism weakens amid concerns over the pace of global economic recovery

Highlights

• The Business Optimism Index for the hydrocarbon sector has dropped to 44 in Q3 from 49 in Q2 on weak selling price outlook. Respondents are uncertain about oil prices following a deep correction of 20% witnessed in May from the peak of USD 84.
• The Business Optimism Index for the non hydrocarbon sector has declined to 36 in Q3 from 50 in Q2 with optimism declining in all the business parameters.
• Manufacturing is the only sector amongst the other non hydrocarbon sectors which has registered an improvement in business optimism.

KUWAIT - Dun & Bradstreet South Asia Middle East Ltd. (D&B), the world’s premier financial data and knowledge provider, in association with Muthanna Investment Company (MIC) has released the Business Optimism Index for Kuwait for Q3 2010.

Background of the Survey

The survey for the Business Optimism Index for Q3 2010 was conducted in June, amidst an environment of volatility in crude prices with uncertainties about oil demand re-emerging due to concerns over the impact of Europe’s debt crisis and the contagion risk. Although the global industrial production and merchandise trade had bounced back in the second half of 2009 and gathered pace during the first half of 2010; the recent debt troubles of Euro Zone have once again raised concerns over the sustainability of the nascent global economic recovery. In its April World Economic Outlook report, the International Monetary Fund (IMF) has projected global economic growth at about 4.3% in 2010. After declining by 3% in 2009, advanced economies are now expected to expand by 2.3% in 2010; while the emerging and developing economies are projected to grow over 6.3% during 2010–11. However, the recent reaction of financial markets to Euro Zone troubles have indicated that the growth for the global economy would remain sluggish, especially in most advanced nations, as various governments are taking measures to consolidate their balance sheets in wake of high fiscal deficits.

After contracting 2.7% in 2009, the Kuwaiti economy is forecast to grow at 3.1% in 2010 and 4.8% in 2011, as reported in IMF’s Regional Economic Outlook: Middle East and Central Asia. Kuwait’s revenues during fiscal year ending March 2010 reached KWD 18 bn. Although 122% above the estimated KWD 8.07 bn, the actual revenues were 15.2% below last year’s level. Oil earnings in 2009-10 reached KWD 16.8 bn, 143% ahead of the conservative budget estimates while non-oil earnings at KWD 1.07 bn were 5.6% higher than projected. The increase in oil prices has in turn helped the government to post a net surplus of around KWD 1.7 bn in the financial year 2009-10. Further, the current year budget is estimated to up government spending by 34% to KWD 16.3 billion and aims to boost economic growth by developing infrastructure.

Commenting on the findings of the Dun and Bradstreet’s BOI survey Rajesh Mirchandani, CEO of Dun and Bradstreet South Asia Middle East Ltd., said: The continuing debt troubles of Euro Zone which has given rise to renewed concerns of sluggish global economic growth has shown its  impact on the business outlook in Kuwait. The hydrocarbon sector optimism has weakened due to recent correction witnessed in international financial markets during May. Though the short term outlook appears to be bleak, continued support and measures taken by the government are expected to support the growth of the economy in 2010.

Hydrocarbon Sector
The BOI survey for Kuwait reveals that the optimism in the hydrocarbon sector is relatively less upbeat in Q3 which is mainly on account of weak selling price outlook. The Composite BOI for the hydrocarbon sector has dipped by 5 points to 44 as compared to the previous quarter with the BOI for Level of Selling Price declining to 45 as against 54 in Q2. The BOI for Number of Employees has dipped to 27 from 35 in the previous quarter. Despite relatively less optimistic outlook towards selling prices and hiring plans, the business units are upbeat about the profitability outlook with the BOI for the Net Profits parameter at 60 as compared to 54 in Q2 2010.

Non hydrocarbon Sector
Amid weak global cues, the BOI survey for Q3 reveals that the optimism of the non-hydrocarbon sector business units in Kuwait has declined to 36 in Q3 from 50 in Q2 with all business parameters registering a drop in their BOI score. The survey reveals that business units are expecting a decline in demand levels as BOI for Volume of Sales has dipped to 46 as against 63 in Q2, while the BOI for New Orders has declined to 49 as compared to 59 Q2. Further, the BOI for Level of Selling Prices is recorded at 19 as compared to 37 in Q2. Weak sales outlook and weak selling price expectations have in turn affected the profitability outlook for Q3 2010 as the BOI for the parameter has dipped 24 points to 40 in Q3. Similarly, the BOI for the Number of Employees parameter has dropped from 28 to 27 in Q3 and that for the Level of Stock has fallen from 30 to 19 in Q3.

Factors Impacting Business
The non-hydrocarbon sector holds a diverse view with respect to challenges facing their business operations in Q3 2010. 41% of the respondents in the non-hydrocarbon sector are concerned about availability of finance and the same percentage of respondents foresee raw material cost as a major challenge facing their business operations. In view of concerns about availability of finance, a substantial 55% of the respondents plan to freeze investments in business expansion while 38% of the respondents are still expected to increase the scale of their operations.

In the hydrocarbon sector, 43% of the respondents foresee project delays as a major concern in Q3 as compared to 55% in the previous quarter. 32% of the respondents are concerned about discovery & development cost and 22% about availability of skilled labor in Q3 2010.

Muthanna Investment Company has commented; the concerns over sustainable growth of the US GDP, unclear Eurozone debt-market situation in Eurozone and a pressure of weak oil prices continues to have negative impacts on the business sentiments of Kuwaiti economy. As revealed by the BOI Q3-2010 survey, fragile demand outlook, availability of finance and increasing raw material costs remained key concerns of economy. Though, the picture looks grimy for a short term outlook, we believe that eminent positive steps taken by the government, in terms of extensive spending of KWD 16.3 billion (up by 34%) during current fiscal year, is poised to shape the economy in coming times

Business sentiments improve due to strengthening hydrocarbon revenues and expectations of increased government spending

• Non hydrocarbon sector business optimism levels for Q2 2010 rise across all parameters
• Transport & Communications sector records highest levels of confidence in all survey parameters
• Hydrocarbon sector optimism for selling prices continues to rise

KUWAIT - Dun & Bradstreet South Asia Middle East Ltd. (D&B), the world’s premier financial data and knowledge provider, in association with Muthanna Investment Company (MIC) has released the Business Optimism Index for Kuwait for Q2 2010.

The survey for the Business Optimism Index for Q2 2010 was conducted in the month of March, when the global economic recovery was showing signs of an uneven and fragile pace against the backdrop of mounting debt concerns in some Euro Zone economies. The correction witnessed in the international financial markets during the first quarter once again highlighted the impact of global fiscal vulnerability in certain countries and cast a shadow of doubt on the global economic recovery. However, the relative strength witnessed in the oil prices over the last few months has aided the fiscal situation in oil exporting economies, allowing for budget and current account surpluses.

Kuwait has recently reported a preliminary budget surplus of US$ 28.9 bn in the first 11 months of the fiscal year owing to strong oil prices. This combined with the planned fiscal and monetary expansion will support economic outlook in 2010, shielding the private sector from the negative impact of uncertainties in global economy. According to the 2010 budget drafted for the period April 2010 to March 2011, the Kuwaiti authorities will raise public expenditure by 33.5% from the previous year, especially the capital spending which is expected to increase 66%. Majority of public spending will be funded by rise in revenues from oil. In addition to the expansionary budget, the Kuwaiti government is scheduled to discuss and approve a US$ 125 bn four-year infrastructure plan to strengthen the logistics and infrastructural base.

The BOI survey affirms the positive and upbeat economic situation in Kuwait as business sentiments for Q2 2010 have improved across all the six parameters from the Q1 levels. The BOI for Volume of Sales has risen 14 points from 49 in Q1 2010 to 63 in Q2. Upbeat expectations towards rising demand have also led to a 30 point jump in the Level of Selling Prices parameter from its level of 7 in Q1 2010. This resurgence in selling price outlook combined with improvement in the sales outlook has lead to a better profitability outlook for the Kuwaiti businesses in Q2 2010. The BOI for the Net Profit has registered a jump of 16 points from 48 in Q1 2010 to 64 in Q2. The BOI for Number of Employees has also shown marginal improvement for Q2 2010 which is recorded at 28, up from 26 in Q1. The level of stock parameter stands at 30 in Q2 2010 as compared to 21 in Q1 2010. Transport & communications sector has emerged as the most optimistic among all the non-hydrocarbon sectors surveyed. The sector has the highest BOI reading among all sectors for Q2 2010 across all the survey parameters.

In the hydrocarbon sector, the BOI survey reveals that a substantial 57% of companies are expecting oil prices to rise in the second quarter, while only 3% expect prices to fall. The BOI for Selling Prices stands at 54, a 16 points jump as compared to Q1 2010. Despite improvement in expectations for higher prices, business sentiments for profitability have declined slightly for Q2 2010. 62% of the respondents in the hydrocarbon sector anticipate an increase in profitability, 8% expect a drop and the remaining 30% do not foresee any change. With respect to the employment outlook, 45% of the respondents anticipate increasing their workforce, 10% plan to downsize and 45% expect no change in Q2 2010.

Commenting on the findings of the survey Phil Strange, CFO of Dun and Bradstreet South Asia Middle East Ltd., said: The Kuwaiti economy continues to show its strength despite the challenging global economic environment. The strong oil prices which have helped the economy to post fiscal surplus for the year 2009-10 will further strengthen the country’s outlook going forward. The D&B study further highlights the underlying improvement in the sentiments of business units as all the parameters in non hydrocarbon sector have recorded an improvement in Q2 2010 as compared to the previous quarter.

The BOI survey also highlights that though various fiscal and monetary measures to ease access to trade finance and boost the overall credit growth are aiding the system, availability of finance still remains the top concern for the business community for the fourth consecutive quarter. This is evidenced by the fact that 40% of the respondents are concerned about availability of finance as a leading challenge faced by their businesses. This is closely followed by 39% of the respondents who are concerned about raw material cost. Despite the challenges posed due to constrained liquidity and difficult credit conditions, a majority of the respondents expect borrowing conditions to improve in Q2 2010. In the hydrocarbon segment, project delays are the chief factor impacting business units.

Muthanna Investment Company has commented; The oil driven economy of Kuwait remains upbeat on the positive outlook for Q2-2010. The steady and fair oil price for past 9 months is certain to uphold in 2010, amid the global recovery. Driven by high oil prices, accumulating budget surplus is providing further strength to the government, to activate its numerous development plans which in turn will have its positive consequences on the business sentiments in Kuwait. Going ahead, we also believe that the CBK’s cut in its benchmark rate will certainly pave the growth-path to key economic sectors like real estate and construction in near term.

Also, approval of 5-years development plan, improving Q1-2010 corporate performance and growing consumer spending under the impression of single digit inflation, all together will definitely mark their positive repercussions on the local business sectors, as reflected by BOI report for Q2-2010.

Published on a quarterly basis, the Business Optimism Index for Kuwait, done in association with Muthanna Investment Company, is the latest addition to D&B’s global series of business sentiment surveys. The next Business Optimism Index for Kuwait will be released in July 2010.