Saudi inflation put at 5.3% in 2010

Inflation in Saudi Arabia could slightly accelerate to around 5.3 per cent in 2010 from nearly 5.1 per cent in 2009 because of higher food prices and a pick up in domestic economic activity, a key Saudi bank said on Sunday.

Banque Saudi Fransi (BSF) said such factors had prompted it to revise its earlier forecasts about inflation in the world’s oil powerhouse from 4.7 per cent to 5.3 per cent, the highest in the six-nation Gulf Cooperation Council (GCC).

In a study sent to Emirates 24/7, the bank said food prices had increased because of the weak US dollar, poor harvest in Russia and the advent of Ramadan, when demand for foodstuff becomes stronger.

“Inflation has re-entered the spotlight this year in Saudi Arabia, which is now experiencing the highest rates of inflation in the Gulf region, touching 5.5 per cent in June, the highest level in more than a year,” John Sfakianakis, Chief Economist at BSF, said in the 13-page study on inflation in the Kingdom.

“Pressure on food prices could become more elevated in the short term due to greater demand in Ramadan as well as short-term external factors, such as higher global food costs caused by some poor harvests (Russia) and a weaker U.S. currency, which tends to push agricultural product prices upward.”

Although annual rental inflation continues to ease as supply bottlenecks are slowly resolved in the kingdom, this will unlikely prevent any drastic decrease in the headline inflation rate, the study said.

“Keeping these factors in mind, we are raising our 2010 forecast for inflation in Saudi Arabia to 5.3 per cent from 4.7 per cent in expectation that the cost of food, residential rents, goods and services could stimulate prices,” it said.

“Current inflationary pressures are elevated given below trend aggregate demand, low monetary pressures and gradual private sector growth.”

BSF said accelerating inflation in 2010 is taking place against an improving macroeconomic backdrop supported by oil prices averaging $76 a barrel in July, higher crude production, stronger business confidence, gains in retail appetite, higher export flows, better rates of bank credit growth and greater tourist visits.

It noted that there has been no substantial decrease in economic activity so far this summer, adding that domestic banks have concluded a number of large financing deals for strategic projects and private investors appear to be building their presence, albeit gradually, in the local market.

The report added that Ramadan usually coincides with a slight slowdown in commercial activity as companies observe shorter working days and take a week-long holiday to celebrate Eid al-Fitr at the end of the fasting month.

As for the 2010 budget, BSF said spending, including outlays that are the highest among G20 countries as a percentage of GDP, continues to provide consistent support for Saudi Arabia’s economic recovery, which will lead to an acceleration of real economic growth of 3.9 per cent this year against 0.6 per cent in 2009.

It said private sector engagement in the economy has witnessed a moderate comeback, evidenced in rising money supply growth rates and six months of consistent growth in private sector bank credit.

Loans worth an estimated SR73 billion should be booked by banks in the second half and into the first months of 2011, the study said.

“Rising food prices may not translate into higher overall headline inflation, however, being largely offset by a number of factors. For one, the annual pace of rental inflation has weakened consistently in 2010,” it said.

“We expect to see acceleration in inflation in July and August in conjunction with Ramadan, and while inflation could ease in the final months of 2010, it is

unlikely to do so substantially, with risks to the upside should food and rents accelerate greater than anticipated.”

BSF said it believes heavy government spending is not leading to inflationary pressures due to higher aggregate demand on capital goods, and labour. “Imported capital goods face intense competition among local suppliers and due to global excess capacity they are better priced today than 2008.”

It noted that housing costs, particularly rents, emerged as the key driver of inflation in 2007 and 2008, when inflation in Saudi Arabia and other Gulf oil producers climbed to one of their highest ever levels.

“While rent inflation remains high, its pace of year-on-year increase declined to 9.2 per cent in June compared with 12 per cent in December….over the same period, inflation in food and beverage prices has picked up pace quickly, rising year on year by 6.2 per cent in June from 0.9 per cent in December,” it said.

“The rise in food prices, particularly over the past three years, has prompted citizens, especially those with fixed and low incomes, to set aside a greater allocation of household expenditures for food products. While rents remain the biggest driver of inflation over all, food is narrowing in, and if this trend continues, food could become the biggest contributor to headline inflation in the coming months for the first time since late 2007. Rents are expected to rise once again toward the final months of the year.”

BSF said some external factors are also likely to keep inflation rates under control in the kingdom, the largest Arab economy.

“In India, a key supplier of food items, mainly rice, for Saudi Arabia, forecasts that revived monsoon rains in August and September will lead to strong harvests of basmati rice and other crops bode well for Saudi food prices post-Ramadan.”

It cited Indian government statistics showing Saudi Arabia's share of India's agricultural exports has been growing steadily in recent years, rising to 8.5 per cent in 2008-2009 from around 5.7 per cent in 2006-2007. Over that period, the value of Indian agricultural exports to the kingdom surged 150 per cent.

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