Saudi realty helps temper prices

Riyadh: Inflation in Saudi Arabia is unlikely to continue rising despite continuing increases in food prices and high rents, analysts said.

Analysts believe that measures taken by the government to increase the number of housing units will ease inflation in the long term, and an expected post-Ramadan fall in food prices will end an inflationary spiral which took the rate to 4.7 per cent in June.

The cost of living also rose 0.4 per cent, increasing from 133.7 points in May to 134.2 points in June, according to data from the Central Department of Statistics released last week.

Meanwhile, food prices rose 0.6 per cent month-on-month in June — 6.2 per cent higher than they were in June 2009.

Saudi Arabia accounts for 63 per cent of the GCC's food and beverage market and the country's growing population, which is expected to double by 2023, has been a key factor behind the rapidly increasing food requirements.

In addition, food consumption per capita is expected to increase 31.24 per cent by 2014, according to BMI statistics.

"The increase in food prices is not unique to Saudi Arabia or the Middle East and North Africa (Mena) region," said John Sfakianakis, chief economist at Banque Saudi Fransi.

"As the population of a region increases, so does the food demand and this leads to an increase in food prices.

"The rise in food prices is a global phenomenon and one which Saudi Arabia is not immune to."

Sfakianakis said food prices have traditionally risen before and during Ramadan and this year will be no different.

"Food prices are set to increase during July and August, but this will be the case for all the countries in the Mena region and not just Saudi Arabia," he said.

Saudi Arabia's housing sector has also affected the country's rising inflation with the demand for low and medium cost housing rising.

Housing costs, which account for 18 per cent of the cost of living index's weighting, rose 0.9 per cent month-on-month in June and were up 9.2 per cent on the year.

The government has taken measures to combat rising rents with a number of real estate development projects that are set to increase the supply of housing over the next couple of years.

Saud Masoud, senior real estate and construction analyst at Rasmala Investment Bank, believes that over the next two years inflation in the housing sector will most likely not experience much of an increase as it undergoes increasing supply.

"There won't be a relatively strong uplift in prices as, outside of certain commodities like food, I don't see mortgages or other drivers pushing prices up in the foreseeable future," Masoud said. Other factors that have influenced the rise in inflation include the steadily increasing gold prices and the political turmoil in the region.

Analysts have pinpointed the causes of inflation, but they remain divided over whether it will rise further next year.

"Any economy that is growing at a good pace is bound to show signs of inflation at some point and the Saudi economy is indeed growing at a good pace," Sfakianakis said.

Twin surpluses

According to a Business Confidence Index report by Banque Saudi Fransi, the economy is likely to grow 5.5 per cent this year, with the government posting twin fiscal and current account surpluses.

Most of the growth will come from the oil and public sectors, while the private sector's expansion should remain below average.

Sfakianakis noted that inflation has fallen to its current 5.1 per cent compared to 5.3 per cent last year, and that there is no reason to fear the double-digit growth experienced in 2008.

"I foresee inflation pressures subsiding to 4.5 per cent by the end of 2013 with the current expectations from the global economy," Sfakianakis predicted.

However, Simon Williams, chief economist at HSBC Middle East, is not so optimistic.

He feels that inflation will continue to rise throughout 2012.

"There is no doubt that the economy is recovering. However, the efforts of the government to boost capacity in the real estate sector will take time to have an effect. I don't expect to see their impact in 2012," Williams said.

Banks cash in on private sector

Saudi Arabia's lending indicators, such as the monetary base, have shown signs of respite after a period of strong growth in March and April, Bank Saudi Fransi said.

A rise in the monetary base is a sign that money is potentially available to the banks for lending.

"We think that the near 10 per cent decline in the monetary base in May is a short-term phenomenon that reflects a correction following the unusually high liquidity that followed the payout of government bonuses," Bank Saudi Fransi said in its latest report. "Moreover, bank credit to the private sector remained buoyant in May despite the reduction in the monetary base. The economy is expanding and that is a fundamental driver of growth in the money supply."

Reverse repo

The amount of commercial bank deposits (reverse repo) held by the Saudi Arabian Monetary Agency (SAMA) fell from 95.7 billion riyals (Dh93.7 billion) in April to 65.5 billion riyals in May.

Banks have deployed this money in the economy in the form of credit to the private sector, as well as credit to government and quasi-government entities. This could be another indication that banks are becoming less risk averse compared to the last two years, the bank said.

It also reflects the fact that deploying capital in the economy is a more profitable use of funds than placing it at a near-cost with SAMA.

Most businesses and individuals have chosen to keep their funds in non-interest-bearing demand deposits,, reflecting their easy accessibility and the poor appeal of savings deposits in the current low interest rate environment.

Demand deposits grew 30.7 per cent year-on-year in May compared to 33 per cent year-on-year growth in April.

In May, demand deposits accounted for 57.3 per cent of total deposits.