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Inflation in Saudi Arabia likely to ease to 10pc, says Samba

JEDDAH - Saudi Arabia’s inflation is expected to ease to around 10 per cent in 2009, according to Samba Financial Group’s monthly monitor for August which was released on Wednesday.

It said that with brisk government spending, and prospect of an early US interest rate hike receding, domestic liquidity growth is likely to remain pronounced. It added that Saudi Arabia’s inflation fell slightly in May but is likely to average 11-12 per cent this year and is expected to ease to around 10 per cent in 2009.

Recent official figures put 12-month consumer price inflation at 10.4 per cent in May, down slightly on the 10.5 per cent registered in April. The continued buoyancy of food prices and rents remains the most immediate cause of inflation. For Saudi Arabia, the key food variable is the price of rice, which has soared this year as a result of climatic events and export bans by key producers, though it has begun to moderate somewhat.

“Firmer liquidity growth is likely to offset the impact of an anticipated softening in global food prices and we have decided to maintain our previous forecast for consumer price inflation at around the 11 per cent mark this year,” Howard Handy, general manager and chief economist of Samba, said in the report.

“US policy tightening should take the heat out of inflation in the course of next year, and with the dollar strengthening and global food supply set to increase, average Saudi inflation should ease to around 10 per cent in 2009,” he added. The cost of construction material - particularly steel - has continued to surge. Global composite steel prices increased by 62 per cent in the year to June, while the local price of steel rebars doubled over the same period. Spiraling construction costs quickly feed through into higher housing prices and rents, with demand supported by robust population growth in major urban areas. According to the Samba report inflation in the Kingdom is not solely attributable to exogenous factors. The monetary backdrop remains extremely permissive: After retreating somewhat in April, the twelve-month growth rate of broad money rebounded to just under 22 per cent in May.

The driver of the build-up in liquidity remains government spending, underpinned by the robust balance of payments position. The authorities have continued to sterilise a large portion of their oil earnings by building up assets abroad. The Saudi Arabian Monetary Agency’s (SAMA’s) net foreign assets totaled some $362 billion at the end of May, and are likely to reach some $420 billion by year-end. Nonetheless, the government is also continuing to inject a substantial amount into the local economy through its massive infrastructure investment programme, as well as through subsidies and additional benefits for public sector workers.

In Saudi Arabia, domestically sourced fiscal revenues account for a very small proportion of total revenues. The Saudi non-oil fiscal deficit has grown from 40 per cent of non-oil gross domestic product (GDP) in 2003 to a forecast 60 per cent in 2008, with clear implications for broad money growth, which is set to exceed 25 per cent this year.The report added that these fiscal injections, in conjunction with the broader investment boom, have also galvanised commercial bank lending to the private sector. Private credit grew by 32 per cent in the twelve months to May, a new record.

Since November, commercial banks have been required to set aside an additional SR22 billion as reserves, equivalent to 1.8 per cent of commercial bank total assets. SAMA has also stepped up its issuance of treasury bills in a bid to mop up excess liquidity. By end-May, outstanding treasury bills had risen to SR56.8 billion, up from only SR4.6 a year earlier.The continued strong growth of private sector credit in spite of SAMA’s efforts reflects the robust expansion of commercial bank deposits. These grew by 23 per cent in the year to May, giving banks ample scope to increase lending, particularly to corporate clients.

The fact that deposit growth has remained brisk despite negative deposit rates is indicative of the weak performance of the Saudi stock market so far this year.The government has committed itself to a “high growth” strategy, designed to make Saudi Arabia the industrial hub of the Gulf region. Investment projects planned or underway currently amount to about $490 billion, equivalent to 90 per cent of forecast 2008 GDP.