Saudi Arabia inflation to decline in 2009

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JEDDAH - The year 2009 augurs well for Saudi Arabia's economy, at least in terms of reining in record high inflation.

Backed by empirical data, regional bankers say that inflation in the Kingdom is set to fall this year.

Standard Chartered Bank, for one, said Saudi inflation will drop to 7 percent in 2009 as slowing economic growth and decline in global commodity prices hit the costs of goods. It figured out that the Kingdom's inflation climbed to 9.2 percent in 2008, up from 4.2 percent in the preceding year.

Saudi American Bank (Samba) concurred with the outlook, adding that a plunge in crude prices and a massive output cut will depress Saudi Arabia's economy in both real and nominal terms in 2009, resulting into weakened inflation.

Samba projected that inflation in the Kingdom would average 9.9 percent in 2008 and would decline to around 8.1 and 7.0 percent in 2009 and 2010.

"For much of 2008 inflation was a serious and pressing issue for Saudi Arabia. From an annual average of just four percent in 2007, 12-month consumer price growth accelerated to a peak of 11.1 percent in July 2008. Nevertheless, price growth has since eased - while remaining high - and the outlook is for moderating inflation in 2009 and 2010," the study said.

After an estimated real growth of more than five percent in 2008, Samba said in a new study that the Kingdom's gross domestic product is bound to decrease by virtually 1.6 percent from the projected more than five percent in 2008, while the decline in nominal terms will be far higher at 23.2 percent.

Standard Chartered economist Mary Nicola said "the relatively moderate slowdown in Saudi Arabia is largely due to the fact that liquidity is more than adequate in the Kingdom."

The decline will reverse a steady five-year rise in the country's GDP per capita income, which is expected to tumble to $14,065 in 2009 after climbing to its highest level of nearly $18,854 since the end of the first oil boom in early 1980s.

"Overall, we anticipate real GDP growth in the Kingdom of just over five per cent in 2008. This is reasonably high by historical standards, but it should be emphasized that this mainly reflects buoyant economic conditions in the first half of the year. Private investment, consumption and net exports are all likely to have weakened sharply in the second half. For 2009, the Saudi economy seems likely to contract in real terms," Samba said in the study.

According to the study, the reversal from an overheated to a contracting economy would ally with lower global prices and other factors to ease Saudi Arabia's inflation pains after suffering from its highest inflation rate of early 11.1 percent in July this year compared to only 4.1 percent in 2007.

"Some of the strains that had fuelled inflation are now unwinding, and we believe that price pressures will continue to subside (gradually) over the next two years. Specific factors that are helping to alleviate inflationary pressures include a decline in global food prices, a fall in headline and core inflation in OECD countries as commodity prices ease and domestic demand weakens and lower prices of imported construction products," Samba said.

Samba said the drop in both oil output and prices would depress the Kingdom's crude export earnings by more than half from a peak of $309.8 billion in 2008 to $138.7 billion next year. Its forecasts showed this would turn a record current account surplus of around $178.3 billion in 2008 into a deficit of nearly $17 billion in 2009.

Saudi Finance Minister Ibrahim Al-Assaf said earlier that the Kingdom's financial reserves can absorb a budget deficit bigger than the |$16 billion shortfall forecast for next year in the new budget.

"Even if oil prices were to fall to levels below those assumed in the budget, we have built up very healthy and big reserves that can cover more than the deficit that we have forecast," he said.

In earlier reports, Samba and other local banks forecast crude prices in 2009 at nearly half the 2008 level.

And on Friday, the oil market kicked off 2009 feebly, falling nearly 8 percent before trimming back losses to around 1 percent once the US market opened.

Oil prices jumped 4 percent Friday amid rising tensions in the Middle East and a dispute between Russia and Ukraine over natural gas supplies that spawned worries over fuel availability in Europe.

US light, sweet crude jumped $1.74 to settle at $46.34 a barrel while London Brent rose $1.32 to $46.91 per barrel. In 2008 oil initially rose by more than $50 to touch a record peak of $147 before falling by more than $110.

On the last trading day of 2008 it surged 14 percent after weekly US data showed a decrease in refinery activity and an unexpected 500,000-barrel rise in crude stocks in the world's biggest oil consumer.

With inflation in the decline, the government is in a better place to take the fiscal and monetary measures to support the economy.

But at current oil prices, it also means that the Kingdom will be spending, not saving its oil revenues.

By Querubin J. Minas

© The Saudi Gazette 2009