Saudi inflation seen rising to 4.5% in 2013

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Inflation in Saudi Arabia is set to reach 4.5 percent this year due to a strong performance in the non-oil sector, Kuwait Finance House (KFH) projected Friday.

Inflation in Saudi Arabia last June was 3.5 percent, Saudi Arabian Monetary Agency records show, the lowest over the past seven months year-over-year (YOY), KFH said in a report about markets of the Gulf Cooperation Council (GCC) countries.

It added that prices of food and beverages sector dropped by 21.7 percent in June thus grew by 6.1 percent YOY.

Prices of food, though declining in June, kept high value due to high global inflation, said KFH.

Inflation maintained its level in the housing and facilities sector at 3.6 percent in Saudi Arabia YOY, said KFH, citing stable renting.

Inflation in the Kingdom, it noted, kept decreasing trend for the fourth month in a row.

KFH predicted too that monetary conditions to remain stable coupled with high liquidity amid high borrowing from banks.

Saudi inflation rate averaged 2.80 percent from 2000 until 2013, reaching an all time high of 11.10 percent in July of 2008 and a record low of -2.00 percent in January of 2001.

In the Kingdom, the most important categories in the consumer price index are foodstuffs and beverages (26 percent of total weight); renovation, rent, fuel and water (18 percent of total weight) and transport and telecommunication (16 percent). Others include home furniture (11 percent); fabrics, clothing and footwear (8 percent); education and entertainment (6 percent); medical care (2 percent) and other expenses and services (13 percent).

In a separate report, the Nielsen Global Survey of Consumer Confidence and Spending Intentions said consumer confidence in Saudi Arabia increased to 100 in the second quarter of 2013 from 95 in the first quarter of 2013.

Saudi Arabia consumer confidence averaged 110.92 from 2010 until 2013, reaching an all time high of 120 in September of 2011 and a record low of 95 in March of 2013.

In another report, Samba in June said in its “Macroeconomic Forecast Update 2013-2015” that Saudi riyal’s peg to the US dollar will remain in place at the current rate for the next three years and beyond. As such, the key Saudi policy rate, the reverse repo, will continue to be governed by US policy rates.

“Saudi interest rates are also influenced by local demand for credit, which we expect to soften over the next three years. Consequently, we see the Saudi interbank rate (SAIBOR) drifting down to around 0.8 by end-2014.”

Moreover, domestic credit demand is expected to continue weakening in 2015, the report said.

“But our working assumption is that the US Fed will raise its benchmark rate in two 25-basis-point steps that year, thereby obliging SAMA to follow suit with equivalent rises,” samba said, adding that these two upward steps in the underlying policy rate will more than offset the downward drift in market demand, leaving SAIBOR at 1.2 percent by end-2015.

The timing, though, of the US policy rate rise might be unfortunate since the reverse repo rate is likely to be raised at a time when demand in the economy is already slackening, it added. Nonetheless, given the number of variables and uncertainties over the period, this represents a risk rather than a likelihood, samba pointed out.

A stronger dollar will help to keep inflationary pressures in check, it added.

This article was first published in theSaudi Gazette.