July 2009

Optimism continues to drop in Q2'09: Have we hit bottom?
    Posted by Hasan Zulfiqar on July 20th, 2009 under category Saudi Arabia

Dun & Bradstreet and National Commercial Bank (NCB) monitor business optimism in the GCC region using the Business Optimism Index (BOI). The quarterly survey randomly selects corporate companies from the D&B database and provides a leading indicator of economic activity.
The latest index on Saudi Arabia, out in June 2009, indicates a worsening of business optimism across all six areas of the survey. The sentiment continues to be subdued when compared to the last few quarters. With more than 38% of businesses not expecting recovery until 2010, both hydrocarbon and non-hydrocarbon sectors of the Saudi economy expect a slowdown in business activity during Q2'09.

Inflationary pressures on the Saudi economy have eased with the drop in commodity prices. Businesses in the non-hydrocarbon sector expect prices to fall further and consequently inflation figures will see a further slide. Similarly, estimates for profits and headcount continue to show a negative trend in these turbulent times. Cautious optimism is being observed across the board in Saudi Arabia as the number of firms investing in plant and machinery shows an improvement against last quarter's survey. As for the hydrocarbon sector, the outlook is more positive as the oil price has been resilient but results in 2009 are nevertheless expected to be weak versus 2008 results.

In short, the sentiment remains mixed – negative when looking at index parameters of net profit, number of employees, level of selling price and volume of sales but positive when looking at inventory and new orders which are show some signs of recovery.
It remains difficult to call the bottom as economic indicators remain volatile. However, the equity markets of the region, especially Saudi Arabia's Tadawal, have rebounded in recent months. This should positively impact investor confidence and drive economic activity.
Source: BOI Saudi Arabia Q2'09

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US Saudi Trade Relations
    Posted by Hasan Zulfiqar on July 15th, 2009 under category Saudi Arabia

A recently published report by SABB highlights the rising value but decreasing volume of trade between the major economies of the West and the Middle East. The Chief Economist at SABB points out that the US remains a major guarantor of Middle East security as well as being a key economic partner of the Saudi Arabia.

The report also highlights the fact that the US is losing share relative to other trading partners while China doubled its trade with Saudi between 2000 and 2007. The oil trade pattern has also changed significantly over the past years with Saudi reducing its trade focus from North America and Europe and sending bulk of the refined exports to Asia to meet their growing consumption.

SABB presents their view on US-Saudi relations and the three key components thereof i.e. politics, economics and security issues. Read more about the intricacies and dynamics of this key relationship in the full report here.

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Food security: KSA plans a US$5.3 billion Agriculture Development Fund
    Posted by Zulfi Hydari on July 14th, 2009 under category Saudi Arabia

Saudi Arabia is aggressively seeking food supply diversification through asset acquisition in Africa and Asia. Savola Al Azizia United Co's Managing Director Mr. Sami Baroum acknowledged the support provided by Saudi Government to help expand food processing businesses beyond the national boundaries, reported Bloomberg in March 2009. Mr. Sami said during a conference in Dubai that, "We are looking to buy strategic food producing assets abroad".

Saudi Government support and active involvement is visible through offerings of term loans and credit facilities out of the US$5.3 billion Agriculture Development Fund (ADF), announced earlier in the year. ADF launch follows the decision to scale back domestic production and save precious water reserves by increasing import of wheat and other food supplies into the country. Preservation of water resources by effective rationalization of its use for agriculture is the prime concern of ADF, according to official sources.

Saudi companies likes Savola and Hail Agriculture Development are investing in food assets abroad to boost agricultural and food production through acquisitions to meet growing demands of the oil rich country. Food producers in the Kingdom are looking at opportunities to buy assets during the financial crisis. Savola is critically evaluating acquisition targets in Pakistan and Africa, while the construction of two sugar processing plants in Egypt will be complete by year end '09.

The success of Saudi authorities in securing food supplies to meet booming demand in the country will be gauged by the deployment of ADF and the ability of local producers to acquire assets abroad. Food security, sustainable water resource utilization and eco-friendly investments continue to be amongst the leading concerns facing the regional giant.
Source: Savola to purchase food assets abroad, Saudi Government Approves Farming Fund


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From Enron to Ahab Group: Corporate Governance continues to be a moving target
    Posted by Hasan Zulfiqar on July 05th, 2009 under category Saudi Arabia

In Dec 2001, Enron filed for chapter 11 after a six month investigation led to the end of 'America’s most innovative Company' as rated by Fortune. After an in-depth investigation, revealed that Enron had been most innovative with its financial structure the firm's erstwhile auditors Arthur Anderson were dissolved. This really brought to the forefront the critical question: in this era of business and financial complexity, who can the investors really trust?

The Securities and Exchange Commission (SEC) was forced to revisit the guidelines for corporate governance (CG) to regain the lost confidence of general public in the transparency and accountability of the CG system. To-date, numerous efforts have been made through Sarbanes-Oxley's enactment and its adoption to improve transparency in Corporate America. Although this system is continuously evolving, tangible benefits in the form of better internal controls, increased reliability of the published financial statements and better public confidence in equity markets has been observed post 2002.

It took seven years for the issue of corporate governance to surface in the region at Al Gosaibi in the Eastern Province of Saudi Arabia. Founded as a money exchange trading concern in the 1940s by Hamad Ahmad Al Gosaibi, the company grew into one of the most respected business groups in the Middle East, a group which has leveraged its brand name to raise debt and owns significant stakes in businesses across the region. However, in May 2009 it announced that it was unable to meet its debt obligations. This triggered a wave of unrest amongst the management, which later announced misappropriations in the financial management system of the Group. The internally orchestrated fraud was blamed on Mr. Maan Al-Sanea, son-in-law of the deceased co-founder of the Group and Chairman of another troubled Saudi conglomerate, Saad Group.

Al-Gosaibi, unlike other business houses, has been candid about the misuse of their assets and has filed cases against Mr. Sanea in the New York Supreme Court. This can be taken as a positive sign and a definite move towards more transparent operations of the Saudi business houses. As the case unfolds, both Al-Gosaibi and Saad Group are expected to face increased allegations and heightened embarrassment. The silver lining is that it might just result in better regulation and control of key management personnel of such groups.
Over the past couple of months, there has been increasing number of voices expressing concern over the integrity and transparency of corporations in GCC region and the business conglomerates which constitute a healthy portion of the economy. I believe that this region has a long way to go in institutionalizing corporate governance and accepting it as beneficial in the long run. A focus on the following areas of governance will do the trick: ownership structures, board composition and remuneration, corporate responsibility and compliance along with financial transparency and information disclosures.

Sources: http://en.wikipedia.org/wiki/Corporate_governance, http://www.economist.com/businessfinance/displaystory.cfm?story_id=14067167, http://news.bbc.co.uk/2/hi/business/1780075.stm

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