Although Saudi Arabia’s high rates of inflation are over four times higher than the average rate of the other four members of the GCC, the government is likely to continue with current fiscal policies to support the recovery of the private sector, Riyadh-based Jadwa Investment has said.
Researchers at Jadwa have therefore revised the country’s full-year inflation forecast up to 5.2 percent in 2010 and 4.2 percent in 2011.
Saudi Arabia hit a high of 5.5 percent in June, less than half the 11 percent peak in June 2008, but well above the 1.2 percent average witnessed since 1980.
The finance firm said that out of 44 leading and developed markets surveyed by Reuters, only Turkey has a higher inflation rate than Saudi Arabia, and the bulk of countries are seeing falling rates.
Jadwa indicated that Ramadan and poor weather conditions in central and eastern Europe were forcing food prices higher, with inflation in this segment up by 6.2 percent in June from -0.3 percent in October last year.
The firm revealed that since 2002, food prices have risen more than five times faster in the Gregorian month in which Ramadan starts than the average for the other eleven months in the year.
In addition, significant government spending has pushed up the prices of raw materials, and public sector pay, pensions and other benefits are also assisting consumer spending.
Elsewhere, strong domestic demand for housing in Saudi Arabia remains high, unlike elsewhere in the Gulf, where demand was largely driven by expatriates, many of whom have now lost their jobs and left.
Jadwa added that another factor contributing to inflation in the second half was a rise in electricity tariffs from July, which in turn will raise production costs for companies such as SABIC.
While external factors have played a part in dampening inflation in Saudi Arabia, Jadwa said that these would continue to be subdued.
“For the moment, we think that the government will accept the relatively high level of inflation in the Kingdom,” the research note stated.
“Its main concern remains supporting the recovery of the private sector and we do not foresee it holding back the implementation of projects, particularly as the costs of the necessary skills and technology are generally well below where they were a few years ago.
“Furthermore, while bank lending growth remains sluggish, there is little likelihood of an adjustment to interest rates, which in inflation-adjusted terms, are heavily negative.”
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