22 May 2013
Inflationary pressure is likely to continue to remain subdued in the Kingdom this year in the absence of external shocks to food prices, says a top Riyadh-based economist.
But rent inflation is likely to remain on an uptrend adding some pressure to headline inflation in 2014, said John Sfakianakis, chief investment strategist at Masic in Saudi Arabia.
His comments to Arab News follow the International Monetary Fund's (IMF) assessment that it was right time for Saudi Arabia to take precautionary measures to contain inflation.
Sfakianakis said the Ministry of Finance is cognizant of the appropriate macro-prudential measures required and any concomitant fiscal adjustments as deemed necessary by the prevailing conditions.
Following talks with Saudi Arabia, an IMF mission said inflation had picked up since mid-2012 due to higher food prices and cost increases for restaurants, hotels and transportation, but remains contained at 4.0 percent.
Saudi economic growth will slow to 4.4 percent in 2013 from 6.8 percent last year due to an expected fall in oil production, and cuts in government spending, the International Monetary Fund said.
"Overall GDP growth is expected at 4.4 percent... because oil output is likely to be lower than its average level in 2012 and the growth rate of government spending looks set to slow," said the IMF.
Commenting on the IMF projections, Fahad Alturki, head of research at Jadwa Investment, told Arab News:
"The IMF forecasts for Saudi economy are in line with Jadwa Investment forecasts. The nonoil private sector is likely to continue on a firm growth path in coming few years as the government maintains the current level of fiscal spending."
In a regular assessment of the Kingdom's economic progress, the IMF also urged Saudi Arabia to take advantage of large budget surpluses as insurance against future oil price uncertainty.
It also said Saudi Arabia faces a possible inflation risk due to buoyant growth that may warrant policy action to prevent the economy from over-heating.
Alturki said: "Domestic inflationary pressure is likely to persist this year given the rapid economic development, but will gradually ease into next year as we see more development in the housing market."
"Macroeconomic policies need to remain vigilant for signs that continued strong economic growth is leading to increased inflationary pressures," Reuters quoted IMF as saying.
According to the Central Department for Statistic and Information's (CDSI's) Consumer Price Index (CPI) inflation data for April, prices rose to 4 percent year-on-year compared with 3.9 percent in the previous three months.
On a monthly basis, prices slightly eased to 0.2 percent in April compared with 0.3 percent in March. Jadwa Investment estimate of Saudi core inflation, which excludes food and housing-related services, also eased to 3.4 percent year-on-year in April compared with 3.5 percent in March. Core inflation was mainly driven by the transport group (5.6 percent year-on-year) followed by restaurant and hotel (5.5 percent year-on-year).
Against this background, the IMF said inflation was contained at this level, but urged the authorities to be ready to act if price pressures rose.
"If inflation were to pick up more than expected or evidence of supply bottlenecks were to emerge, then either macro-prudential policy would need to be adjusted or capital spending projects slowed," IMF said.
Commenting further on the IMF statement, John Sfakianakis said the macroeconomic picture of Saudi Arabia continues to look very solid and auspicious given total GDP and sectoral growth.
"The fund's forecast of 7.6 percent nonoil private sector growth for this year is a bit below the 8.3 percent average growth over the last nine years. Interestingly, and over the same period, the government sector has grown at an average of 6 percent which is significantly lower than the private sector and shows the ability of the nonoil economy to pick up its growth pace."
He said: "Saudi Arabia's GDP for 2013 will be at least a full percentage point higher than what the fund's forecast. It's typical of the fund to forecast a more conservative headline figure. I do believe that there are enough evidence pointing to a sustainable growth story than a few years back due to the private sector growth."
However, Sfakianakis added: "I think the fund's concern on the economy overheating is less warranted by the evidence as inflation has been declining since 2009 even as government spending has increased.
Inflationary pressure will continue to remain subdued this year in the absence of external shocks to food prices."
Tamer El Zayat, senior economist at the National Commercial Bank (NCB), said IMF growth estimates are in line with our expectations at the NCB of 5.4 percent and 7.7 percent for real GDP and nonoil GDP, respectively.
The figures are sustainable given the momentum of awarded construction contracts that are supportive of both the construction and manufacturing sectors. Improved business sentiment is another factor that will underpin these forecasts on the back of elevated oil prices and robust macroeconomic fundamentals. "As for risks to price levels, the rate of inflation, in my opinion, will remain contained around 4 percent this year on the back of suppressed imported inflation," El-Zayat said.
Jarmo T. Kotilaine, a regional analyst, told Arab News, said: "With rapid economic expansion and a robust pace of bank lending, the possibility of price pressures emerging in parts of the economy exists. However, it is important to bear in mind that much of the momentum is linked to necessary structural changes the development of the housing stock and infrastructure as well as new business and job creation. Moreover, inflationary pressures can be contained through more active liquidity management should this become necessary."
He said: "There is an obvious cyclical element to strong growth at a time when high oil prices and production have a trickle down effect to the rest of the economy. However, boosting the sustainable growth rate has for long been a central government objective. The ongoing capital spending and economic diversification are designed to do precisely that."
Inflationary pressure is likely to continue to remain subdued in the Kingdom this year in the absence of external shocks to food prices, says a top Riyadh-based economist.
But rent inflation is likely to remain on an uptrend adding some pressure to headline inflation in 2014, said John Sfakianakis, chief investment strategist at Masic in Saudi Arabia.
His comments to Arab News follow the International Monetary Fund's (IMF) assessment that it was right time for Saudi Arabia to take precautionary measures to contain inflation.
Sfakianakis said the Ministry of Finance is cognizant of the appropriate macro-prudential measures required and any concomitant fiscal adjustments as deemed necessary by the prevailing conditions.
Following talks with Saudi Arabia, an IMF mission said inflation had picked up since mid-2012 due to higher food prices and cost increases for restaurants, hotels and transportation, but remains contained at 4.0 percent.
Saudi economic growth will slow to 4.4 percent in 2013 from 6.8 percent last year due to an expected fall in oil production, and cuts in government spending, the International Monetary Fund said.
"Overall GDP growth is expected at 4.4 percent... because oil output is likely to be lower than its average level in 2012 and the growth rate of government spending looks set to slow," said the IMF.
Commenting on the IMF projections, Fahad Alturki, head of research at Jadwa Investment, told Arab News:
"The IMF forecasts for Saudi economy are in line with Jadwa Investment forecasts. The nonoil private sector is likely to continue on a firm growth path in coming few years as the government maintains the current level of fiscal spending."
In a regular assessment of the Kingdom's economic progress, the IMF also urged Saudi Arabia to take advantage of large budget surpluses as insurance against future oil price uncertainty.
It also said Saudi Arabia faces a possible inflation risk due to buoyant growth that may warrant policy action to prevent the economy from over-heating.
Alturki said: "Domestic inflationary pressure is likely to persist this year given the rapid economic development, but will gradually ease into next year as we see more development in the housing market."
"Macroeconomic policies need to remain vigilant for signs that continued strong economic growth is leading to increased inflationary pressures," Reuters quoted IMF as saying.
According to the Central Department for Statistic and Information's (CDSI's) Consumer Price Index (CPI) inflation data for April, prices rose to 4 percent year-on-year compared with 3.9 percent in the previous three months.
On a monthly basis, prices slightly eased to 0.2 percent in April compared with 0.3 percent in March. Jadwa Investment estimate of Saudi core inflation, which excludes food and housing-related services, also eased to 3.4 percent year-on-year in April compared with 3.5 percent in March. Core inflation was mainly driven by the transport group (5.6 percent year-on-year) followed by restaurant and hotel (5.5 percent year-on-year).
Against this background, the IMF said inflation was contained at this level, but urged the authorities to be ready to act if price pressures rose.
"If inflation were to pick up more than expected or evidence of supply bottlenecks were to emerge, then either macro-prudential policy would need to be adjusted or capital spending projects slowed," IMF said.
Commenting further on the IMF statement, John Sfakianakis said the macroeconomic picture of Saudi Arabia continues to look very solid and auspicious given total GDP and sectoral growth.
"The fund's forecast of 7.6 percent nonoil private sector growth for this year is a bit below the 8.3 percent average growth over the last nine years. Interestingly, and over the same period, the government sector has grown at an average of 6 percent which is significantly lower than the private sector and shows the ability of the nonoil economy to pick up its growth pace."
He said: "Saudi Arabia's GDP for 2013 will be at least a full percentage point higher than what the fund's forecast. It's typical of the fund to forecast a more conservative headline figure. I do believe that there are enough evidence pointing to a sustainable growth story than a few years back due to the private sector growth."
However, Sfakianakis added: "I think the fund's concern on the economy overheating is less warranted by the evidence as inflation has been declining since 2009 even as government spending has increased.
Inflationary pressure will continue to remain subdued this year in the absence of external shocks to food prices."
Tamer El Zayat, senior economist at the National Commercial Bank (NCB), said IMF growth estimates are in line with our expectations at the NCB of 5.4 percent and 7.7 percent for real GDP and nonoil GDP, respectively.
The figures are sustainable given the momentum of awarded construction contracts that are supportive of both the construction and manufacturing sectors. Improved business sentiment is another factor that will underpin these forecasts on the back of elevated oil prices and robust macroeconomic fundamentals. "As for risks to price levels, the rate of inflation, in my opinion, will remain contained around 4 percent this year on the back of suppressed imported inflation," El-Zayat said.
Jarmo T. Kotilaine, a regional analyst, told Arab News, said: "With rapid economic expansion and a robust pace of bank lending, the possibility of price pressures emerging in parts of the economy exists. However, it is important to bear in mind that much of the momentum is linked to necessary structural changes the development of the housing stock and infrastructure as well as new business and job creation. Moreover, inflationary pressures can be contained through more active liquidity management should this become necessary."
He said: "There is an obvious cyclical element to strong growth at a time when high oil prices and production have a trickle down effect to the rest of the economy. However, boosting the sustainable growth rate has for long been a central government objective. The ongoing capital spending and economic diversification are designed to do precisely that."
© Arab News 2013
