Wealth gloom haunts Saudi economy

The Saudi economy could continue to feel the strains of a slowdown in domestic consumption due to a recent stock market crash and a rise in inflation, SABB bank, a subsidiary of HSBC, said in a report.

"The 'wealth effect' that caused a consumer frenzy in 2005 made many consumers feel more spending cautious in 2006," said the report by SABB's Chief Economist John Sfakianakis.

SABB expects Saudi economic growth to slowdown to 3.7% in 2007 against 4.2% in 2006 on the back of rising inflation which is expected to reach 3.5%, nearly double its level in 2006.

"People now tend to feel less wealthy and that has taken its toll on consumer spending ... We do continue to be vigilant on consumer behaviour as consumption is an important contributor to growth," it said.

There are no official figures on the contribution of domestic consumption to the Saudi economy, Sfakianakis said.

"Because the economy is growing, domestic consumption will not decline in absolute terms, but its growth will decline in 2007," he said.

Real non-oil private sector growth was 6.3% in 2006 down from 6.5% in 2005, the report said.

The decline was mainly due to a 19.2% fall in wholesale, retail, restaurants and hotels and a 33.3%fall in activity in the insurance, real estate, business service and finance sectors.

"We believe these declines illustrate reduced consumer spending associated with the stock market collapse," SABB said in the report.

The Saudi stock market, the Arab world's largest, is still struggling to recover its poise more than a year after the start of a crash which has more than halved its value and hurt hundreds of thousands of Saudis.

The government had been encouraging ordinary Saudis to subscribe to a raft of initial public offerings over the previous two years as a way of spreading the wealth accruing from the world oil price boom.

Consumer loans inched down 0.1% in 2006 after a near-57% rise in 2005 and a 630% rise between 2000 and 2005, SABB said.

"The 2006 drop in consumer loans is miniscule but it is representative of subdued borrowing related to the market crash," SABB said.

The crash's worst macro-economic aftershocks are abating. "The severity of the stock market correction ... should have brought the economy to its knees but this did not happen".

But its effects on household indebtedness and spending patterns can not be ignored, SABB said.

"It is not coincidental that this year's sales season was extended until later in March," the report said.

SABB's survey showed that inventories are rising and have not declined as expected during the sales season, which has prompted retailers to hike discounts from 30%-50% to more than 70%.

"We have to consider that retailers are also responsible for this high inventory build up as they anticipated high demand growth in 2006," SABB said.

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