LONDON, 6 June 2004 — Business confidence in the Middle East can be difficult to gauge given the continuing instability in Iraq and in the Palestinian territories. There has also been the recent terrorist violence in Saudi Arabia, and the inevitable knock-on effect on the rest of the region.
Sentiments also differ depending on the country market segment. The recent increases in oil prices have been a boon to the GCC countries, which experienced impressive GDP growth rates in 2003, and are expected to reach 7 to 7.5 percent in 2004. While this may largely be due to the oil price bonanza, the non-oil sector in the region is also experiencing robust growth.
However, some banks and corporations rue the fact that events in the region have affected business sentiments by creating an impression of instability. This perception, they maintain, is exacerbated by negative coverage of events on the ground by the international media.
Against such a background, HSBC, the “world’s local bank”, launched its Middle East Business Confidence Index on Friday, which it claims is the first of its kind for the region. “We have launched this initiative for a number of reasons,” stresses David Hodgkinson, chief executive and deputy chairman of HSBC Bank Middle East Limited.
“There is no equivalent measurement in the region for how businesses are feeling about their economic prospects. Business confidence indices exist elsewhere in the world and have proved their worth for commercial decision makers in those countries as well as for those who are considering doing business there. We feel that it is appropriate that the region’s largest international bank should launch such an initiative, which we believe will be of particular benefit to our clients.”
HSBC has teamed up with YouGov, a UK-based market research agency, which it commissioned to create an online platform to receive responses from the commercial, government, economic and media sectors in the region’s leading economies. The bank has also joined forces with the Middle East Economic Digest (MEED) which will publish the first index on June 11, and which is also involved in calculating the index scores, through the identification and input of various economic and financial indicators.
The index, which will be published three or four times a year, also aims to “provide a new set of parameters” for decision-makers and corporate and commercial clients. Already the British government is interested in using it for its future export promotion activities in the Middle East and North Africa.
The first index, stresses Nadhim Zahawi of YouGov, is based on a survey sample of 887 individuals — 34 percent Middle East nationals, and 61 percent expatriates resident in the Middle East. The respondent profile for both categories is heavily weighted in favor of two countries, the UAE and Saudi Arabia. Some 75 percent of them work in the private sector especially in banking and finance, construction, and in the oil and gas sectors. The main findings of this initial survey, according to YouGov, is a general sense of optimism among business leaders in the Middle East, and rises in profits are expected. However, when it comes to political stability, this optimism decreases sharply, although economic liberalization policies in the region are generally perceived as aiding rather than hampering business. The UAE emerges as the top for economic liberalization, followed by Qatar, Kuwait, Saudi Arabia, Iran, and Egypt.
The survey also reveals a surprisingly optimistic take on economic prospects in Iraq, predicting a significant new market within the next 12 months. Such surveys are largely based on the subjective views of individuals living or working in the region. The quality of these indices depend on the quality of knowledge of the respondents, not only about economic markets, but also about social, religious, and political trends in these countries. Even businessmen and bankers can be notoriously blinkered when it comes to reading business, socio-political, and economic risks in markets.
Both YouGov and MEED acknowledge that the index is in a developmental phase, especially where indicators such as social trends and demographics are concerned, given that some 60 percent of the populations in the Middle East countries are below the age of 25. It will depend on the availability of reliable statistics, which is a major problem in the region due to an under-developed culture of transparency at all levels.
The efficacy of the HSBC Middle East Business Confidence Index can only properly be analyzed once it gets a track record, and reveals more about its methodology, including the number of surveys, the size and response ratio of those canvassed, and the volatility ratio of the surveys.
Whether there is any margin of error for this index is a moot point. However, assuming that this index will flourish, given the status of its promoter, HSBC, it will inevitably impact on such mundane banking components as cost of capital and pricing for a particular market, whether for a commercial loan, syndication, or even a bond.
If the mean score for a particular country dips below say, 5 out of 10, where a low score indicates low business confidence in a national market, will this eventually impact on the pricing for a commercial loan or syndication arranged by foreign banks; and to what extent? After all, credit and country ratings do have such an impact, and sometimes to devastating effect. For HSBC, this index is indeed a major coup. It is after all the largest international bank serving the region, and has plans for further expansion. Indeed, as Hodgkinson explains, HSBC Middle East has applied for an investment banking license in Saudi Arabia, under the new capital market law. But the Kingdom has yet to finalize the capital market regulatory authority, a process which many foreign bankers stress could be speeded up.
However, they remain encouraged that despite the frustratingly slow pace of reform there is momentum in the right direction.
