Despite being successful in sidestepping the landmines of the current global slowdown, the economy of Saudi Arabia has not avoided the salvoes fired by worldwide food price rises, new research has revealed.
Even as the coffers of the world's largest oil exporter are bursting at the seams with oil prices reaching historic highs, according to report prepared by the Saudi British Bank, or Sabb, foodstuffs imports by Saudi Arabia, the Middle East's largest food importer, have increased by an average of 19 per cent between 2004 and 2007, reaching SAR44.8 billion last year.
"A 26 per cent increase was noted from 2006 to 2007. The food bill has been progressively rising since September 2007, evidenced by the private sector's appetite for letters of credit through commercial banks," said John Sfakianakis, chief economist, Sabb. As a result, Sabb anticipates Saudi inflation in 2008 to average 7.9 per cent on an annualised basis against 4.1 per cent in 2007. "Inflation within single digits may be beneficial to growth, but inflation in double digits could result in much slower growth," warned Sfakianakis. "We expect higher inflation to arise from increased local food prices, higher fees in the service sector and the continuing growth in rents, construction costs and wages."
Food price inflation is not a uniquely Saudi phenomenon. Food prices in Saudi Arabia are rising due to the high prices of agricultural commodities around the world. Global agricultural prices rose sharply in 2006 and 2007 and, so far, have increased by around 30 per cent in 2008.
Rice prices have increased by more than 90 per cent over the past two years, while wheat prices doubled in less than a year. Corn and soya are trading at well above their 1990s average and coffee prices are running at 10-year highs. In some countries, milk and meat have more than doubled in price.
Domestically produced foodstuffs are also rising as the prices of a lot of the agricultural inputs are on an upward trend in Saudi Arabia. But food price inflation in Saudi Arabia, argues the report, is mainly due to the import volumes with domestic food inflation a mere contributing factor.
"We believe that greater effort is required to promote market forces in such sectors as red meat and vegetables, especially in locally produced items," said Sfakianakis. The cause of the price rises in some areas of the fruit and vegetable sector has been attributable to speculation (with the cold spell over the past two years helping vegetable and fruit producers to spike their prices with unreasonable haste). But there are also structural impediments, such as labour constraints, he said.
Contrary to popular belief that the rice and dairy sectors are collusive and non-competitive, the Sabb report infers that it is the global trade in rice that requires liberalisation. "Saudi Arabia is inevitably a major importer of rice, and its preference for one type of rice [basmati] makes the demand very inelastic," he said. "Those who are beginning to hoard rice in the Kingdom are the consumers themselves, rather than the importers."
After Iran and Iraq, the Kingdom is the third largest rice importer in the Middle East – and is the world's biggest importer of basmati rice. According to the report, the Kingdom will move from being a net wheat producer to a wheat importer during the next decade.
In a global market where wheat stocks have been in freefall since 1997, the Kingdom may face a demand predicament as a major wheat importer in years to come.
Commodity forecasts by the FAO, OECD, USDA and World Bank suggest that food crops prices will remain high in the time to come. According to the World Bank, high prices for crops are likely to remain above the 2004 levels through 2015. Rice will witness the steepest rise, expected to increase by 92 per cent, followed by sugar at 85 per cent. Soybeans and soybean oil will see the smallest increase by 2015, rising by 27 and 19 per cent, respectively.
In Saudi Arabia, rice is reckoned to represent around three per cent of the cost of living index, the report said. But as the government has intervened with a subsidy to cushion the blow, the effect of higher rice prices has been somewhat mitigated. Had it not intervened, the index percentage attributable to rice would vary, depending on price increases locally.
This year alone, Saudi Arabia will spend more than SAR12bn in subsidising food prices, on top of an estimated SAR7.9bn in indirect subsidies, such as water, electricity. Poultry and meat, which Sabb estimates to carry more than twice the index weighting of rice, contribute significantly more to the overall inflation than other products.
If meat prices follow the path – without any government subsidies – the effects would be graver for everyone, especially those in the low-income bracket.
Fruit and vegetables lie somewhere between the weightings of rice and meat products, but their tendency to upward price fluctuations can also impact heavily on the overall inflation figure.
Given that the food exporters, such as India, are also faced with growing domestic demand and rising inflation, the export of foodstuffs will take second place to securing local demand. This will not only lead to shortages in food-importing countries, but also create even more price pressure, especially on rice, further feeding food price inflation.
"We do not expect inflation to abate in 2008; the new measures [increasing subsidies] could have a mitigating effect, but only if a basket of 664 other imported products, in addition to the 180 basic items, remain at a reasonably stable price level," said Sfakianakis.
"If global food prices continue to climb, such increases will be felt in the Kingdom and public discontent with food importers will increase. Food and rent inflation account for the bulk of inflation in Saudi Arabia. We anticipate that the inflation figure, on a month-to-year basis (which gauges more closely the inflationary pulse of the market on a continual basis) will this year reach low double-digits during certain months."
Another key reason for Saudi food price inflation is the Kingdom's rapidly rising population, which is expected to reach around 53 million by 2050. "However, the rising demand for food is also attributable to the large influx of expatriate workers, who, as in the 1970s boom, are again in great demand for the country's many development projects," said Sfakianakis. During 2007 alone, 1.7 million work visas were issued for the Kingdom, the report said
But the boom in agricultural commodities is not only due to simple supply and demand dynamics, according to the report. Speculation, which has become the main factor keeping crude oil prices above $100 per barrel at a time of recession in the US, has also contributed to the boom in agricultural commodities.
With the proliferation of mutual funds and exchange-traded funds tied to commodities (including crude oil), speculative buying has witnessed new highs over the recent past, as a way of spreading risk and receiving greater returns during highly volatile times in the financial markets.
Over the past two years, food and other commodities have acquired a quite irrational glamour for speculators, fuelled by limited supply and rising demand. To an extent, hoarding by consumers has also fed the rise, by spurring importers to seek supplies sooner. "The challenges of supply and demand have created the possibility of a speculative bubble," said Sfakianakis.
For the immediate future, Saudi Arabia will remain vulnerable to global food price fluctuations – and will have to make some tough decisions about its agriculture sector, concludes the report. Given the high population growth rate, food self-sufficiency is not possible – with water availability falling, as long as the current water policy remains static.
SABB'S RECOMMENDATIONSAs food prices rise around the world, the Kingdom has to better allocate its subsidies.
Targeted subsidies are more valuable than all-encompassing ones. Direct cash transfers to those most in need are a good way to move forward; and cash or near-cash transfers [food stamps] can be measured against income, occupation and location. Although the Saudi foodstuffs sector is more competitive than is widely believed, Sabb recommends the adoption of other beneficial measures, including:
- The establishment of a food price index for all regions of the Kingdom (based on Riyadh's price index model)
- Price labelling on all packaged products
- Mandatory disclosure of discounts which wholesalers and food producers give retailers, so as to safeguard transparency in profit margins
- Added transparency in the agreements reached between local farmers and wholesalers, and in those between meat wholesalers and retailers
- Fully documented production and transportation of locally made food products, for checking by the authorities
- Enhanced competition under the auspices of the competition committee.
- A legally enforceable definition of 'illegal profiteering' common in many countries
- When economic conditions permit, food producers, wholesalers and retailers should – as a matter of social responsibility – make a concerted effort to reduce prices
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