High oil prices may push up GCC inflation: report

The improvement in oil prices and projections they could increase further will largely benefit Gulf crude producers but they carry risks of a return of high inflation to the region, according to a Saudi investment firm.

Risks also include continued reliance on public spending for growth in the domestic economy in the six-nation Gulf Cooperation Council (GCC) and this could stifle prospects of early private sector recovery, said NCB Capital (NCBC), an affiliate of National Commercial Bank, Saudi Arabia’s largest bank.

In its weekly report sent to Emirates Business, NCBC said GCC nations could also benefit from a possible rise in oil production in case the 12-nation OPEC decides to lift output to prevent a sharp rise in prices.

It noted that the Organization of Petroleum Exporting Countries, which pumps just under 40 per cent of the world’s oil supplies but controls nearly 70 per cent of the global crude resources, have indicated it could boost output to keep prices at its self-assigned ceiling of around $80 a barrel. This means the Cartel could use part of its massive spare capacity of nearly six million barrels per day, of which around 85 per cent is based in Saudi Arabia and other GCC members.

“The projected resilience and gradual increase of the oil price is broadly speaking a welcome development from the perspective of Gulf economies.  It should make for a backdrop of relative macroeconomic stability and a strong fiscal position. However, the forecast also involves risks, especially in two key areas,” it said.

“Firstly, the recurrent volatility of the oil price may have adverse implications for economic sentiment, thereby potentially further delaying and subduing recovery in the private sector.  This risks making economic growth more heavily dependent on government spending than should be ideal. …secondly, positive news on the oil price will push up liquidity levels and complicate further the efforts of especially the Saudi authorities to contain inflation.”

A surge in crude prices to a record high average of around $95 in 2008 allied with weakening US dollar and a sharp rise in global commodity prices to push up inflation rates in the GCC to one of their highest levels. Qatar and the UAE were hit hardest, with inflation climbing to nearly 15 and 12.3 per cent respectively.

The problem sharply eased in 2009 following the global fiscal distress, the ensuing plunge in oil prices and strengthening of the US dollar, to which GCC currencies, except the Kuwaiti dinar, are pegged.

Inflation so far this year has remained subdued in most GCC members except Saudi Arabia, where it has gradually risen above four per cent mainly because of an increase in food prices and rents.
 

Follow Emirates 24|7 on Google News.