Saudi can do little now to tackle inflation: Report

Saudi Arabia does not have sufficient fiscal tools at present to deal with domestic inflation that has surged over the past few months mainly because of high rents and food prices, a key Saudi bank said on Tuesday.

Inflation in Saudi Arabia jumped to a 17-month peak of nearly six per cent in July although economic recovery has yet to gain any notable impetus and annual private sector credit is recording slow growth, Banque Saudi Fransi (BSF) said.

While higher oil prices have not yet given a strong impetus to the domestic economy, they have largely supported the Gulf kingdom's fiscal position, BSF said in a study sent to Emirates 24/7.

Its figures showed the net foreign assets of the Saudi Arabian Monetary Agency (SAMA), the country's central bank, surged by over nine per cent year on year to reach nearly SR1.56 trillion (Dh1.54 trillion) at the end of July, the fastest pace of growth in 14 months, according to the study.

"Despite the lack of monetary pressures, however, inflation is beginning to re-enter the radar screen.  The kingdom's inflation rate jumped to a 17-month peak of six per cent in July, stemming from rises in food prices, rents and general goods and services," BSF chief economist John Sfakianakis said in the study.

"Furthermore, there is little that SAMA can do with monetary policy manoeuvring at this stage to quell accelerating price pressures that led inflation to accelerate in July - the highest inflation rate since February 2009."

It cited official figures showing food and beverage inflation increased to seven per cent in July from less than one per cent last December, stemming from both higher global commodity prices and rising domestic demand as consumers prepared for the fasting month of Ramadan, which began on August 11.

"Anecdotal evidence shows food prices rose sharply for many items, such as dates, which are up about 10 per cent and meat, which has witnessed rises of 7-15 per cent. Food and beverages have the biggest weighting on the index of 26 per cent, followed by rents and utilities at 18 per cent," the study said.

It showed that rental inflation, while still a steep 8.9 per cent, has been decelerating year-on-year for past seven months.

"The main thrusts behind accelerating inflation, hence, have been food prices and other goods and services, which rose an annual 9.1 per cent in July. As inflation rates rise, money supply growth has declined, thus pointing to a disconnection between monetary pressures and inflation rates."

Turning to bank lending, a key factor in economic growth and inflation, the report showed claims on the private sector expanded 4.9 per cent in July, up from 4.4 per cent in June and the fastest rate of growth in more than a year.

It said bank lending, hit by the 2008 global fiscal crisis and local default problems, has gradually gathered speed for the first seven months of 2010 from virtually no annual growth in January to a cumulative rise of 3.2 per cent by July.

"Put into context, loan growth is very slowly recovering from a low base and is negligible when compared with rates exceeding 20 per cent, and often 30 per cent, in 2008. While they do boast ample liquidity, Saudi banks continue to be wary about extending new corporate credit as they continue to take provisions to guard against possible non-performing loans," BSF said.

It showed bank claims on the private sector edged up by 0.6 per cent in July, slightly below the month-on-month rate of 0.9 per cent recorded in June.

"There has, therefore, been very little credit growth momentum despite government efforts to push ahead with strategic infrastructure projects. Bank claims on the public sector increased almost four per cent in July, following three months of contractions," the report said.

It noted that the SR205.69 billion in public sector claims were still down 1.5 per cent from the year earlier. New loan growth in July was largely comprised of facilities carrying short-term maturity (less than one year), it added.

"That category grew 2.4 per cent, while medium and long term credit declined.

The exception to passive loan growth appears to be consumer lending. Saudi banks have been looking to boost their retail banking portfolios to tap into the Gulf region's strongest domestic demand story," BSF said.

The Saudi population, according to the latest census numbers, stood at 27.1 million in early 2010 - more than 60 per cent of the GCC's population, it said.

"The pace of Saudi consumer lending growth picked up in the second quarter, reaching almost 10 per cent compared with nearly 7.2 per cent in the first quarter," BSF said, citing SAMA's figures.

"In the three months to June 30, real estate finance surged 30 per cent from the year earlier while auto finance was up 6.2 per cent. Credit card lending, by contrast, fell 5.2 per cent over the same period, as banks are carefully assessing their client base and risk profile."