GCC urged to cut food imports to curb inflation

Inflation in the region beyond the control of monetary authorities, says NCBC

Gulf oil producers need to set up a strategic food stockpile and curb speculation in the real estate sector as part of overall measures intended to control inflation following the recent rise in the price index, a Saudi investment firm said on Monday.

Given the long standing peg between their currencies and the US dollar, Gulf Co-operation Council (GCC) countries have little room to tackle inflation, which is aggravated by rising global food prices and housing supply shortages in some members, said NCB Capital, owned by National Commercial Bank.

In a study sent to Emirates Business, NCBC said it believed the main drivers of current inflationary pressures in the GCC are structural and to a “significant extent beyond the control of monetary authorities".

It said the situation in global agricultural commodities appears to be part of an ongoing long-term bull market, caused by population growth, urbanisation, and higher living standards, especially in emerging markets.

“The GCC authorities need to take measures to ensure their security of supply and they can build up strategic reserve to manage temporary price spikes.

"But greater monetary policy autonomy is unlikely to help contain the effects of a secular trend and subsidies can easily create lasting distortions,” NCBC said.

“In the housing market, the experiences of the West demonstrate the folly of indiscriminately boosting credit in a bid to improve affordability. The only consequence of this would be a renewed bubble. Instead, efforts to contain speculative behaviour, boost long-term finance, create a properly regulated  mortgage market (to improve affordability for people currently excluded from the market), and review zoning regulations are needed for long-term stability.

"The near-term goal should be sustained supply response to overcome the most acute shortages, especially in residential real estate.”

Inflation in the GCC soared to record high annual rates through 2007-08 because of a surge in domestic demand due to strong oil prices, rising rents and global commodity prices, mainly food, and a weakening in the US dollar, to which GCC currencies, except the Kuwaiti dinar, are pegged.

The rates dipped to very low levels after the 2008 September global fiscal distress but have resurged in some members, mainly Saudi Arabia, the largest Arab economy and the world’s dominant oil power.

“Recent months have been a source of growing disillusionment for those expecting the unusual bout of GCC inflation in 2007-08 to go down in history as a temporary anomaly. Even though the double-digit rates quickly moderated after the oil price correction in the second half of 2008, prices failed to stabilise at the new low level. After a trough towards the end of last year, inflation has once again resumed a remarkably consistent uptrend across the GCC in spite of renewed global economic turbulence,” NCBC said.

“However, the rate of price increases varies a great deal across the Gulf. Some of the coastal markets hardest hit by a property market correction are experiencing very low rates of inflation whereas in Saudi Arabia the annualised rate now exceeds five per cent, even though inflation still appears unlikely to accelerate significantly, efforts to contain it are complicated by the structural nature of its drivers, including renewed pressure in the agricultural market.”

The report said the dramatic volatility in GCC headline inflation figures over the past several years stands in sharp contrast to a history of consistent low inflation, which had not exceeded two per cent in most years during the 1990s.

Prices in the region began to climb at an accelerating pace in second half of 2007, led above all by a sharp rally in oil prices but further amplified by the weakness of the dollar, housing market speculation, and global supply shocks in agricultural products, according to NCBC.

Citing official data, it said Saudi inflation peaked at 11.1 per cent year-on-year in July 2008 but the abrupt reversal in the oil price in the summer of 2008 pushed the rate down to a 30-month low of 3.5 per cent in October 2008.

“Instead of stabilising, however, new price pressures once again began to make themselves felt in the kingdom since late 2009. By June last year, inflation in Saudi Arabia reached a 13-month high of 5.5 per cent,” the report said.

“In spite of experiencing very similar price dynamics, the GCC economies have seen sharp differences in their headline inflation rates. The inflationary boom up to the summer of 2008 was most pronounced in markets with the biggest real estate booms... Not surprisingly, these markets underwent the sharpest corrections thereafter as property prices dropped, in the case of Dubai by as much as 50 per cent. The sharp declines in rentals and other housing-related costs hence pushed a key component of the Consumer Price Index well into the negative territory in some of the Gulf coast markets.”

The report showed that Saudi Arabia, by contrast, avoided the real estate excesses of its neighbors as it faces persistent shortages in many key market segments.

“With smaller corrections, Saudi Arabia headline inflation rates have since late 2009 been clearly ahead of its regional neighbors.”

NCBC said the resumption of inflationary pressures in the GCC highlights the dominance of food and housing in the regional Consumer Price Indexes.

“For instance in Saudi Arabia, they account for 26 and 18 per cent, respectively, of the overall basket. In spite of the significant intra-regional variation, it is likely that even the hardest-hit GCC property markets have now experienced most of the downturn that is likely to materialise during this crisis,” it said.

“Even if risks posed by increased excess supply cannot be ruled out in markets such as Dubai, the near-term outlook is increasingly turning into one of increased volatility rather than consistent declines. Under the circumstances, housing costs are less and less likely to contain the headline inflation figures.”

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