Jun 08 2012 |
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KFH-Research: Rates of real estate in Saudi Arabia increases average inflation rate to 6% in 2012
6% growth rate for this year
Despite growth, Saudi Arabia must supervise prices of consumption items
The need to increase social expenditure pressurizes governmental expenditure
The expectations of the International Monetary Fund are seconded by a report issued by KFH-Research, where they expected that the growth rate in Saudi Arabia will reach 6% this year, triggered by high increases in the production and rates of oil, in addition to the good management of the economy.
However, the report mentioned that inflation rates in Saudi Arabia will continue to increase to an average of 6% during 2012, based on the increase in rates of real estate, high liquidity, and increase in demand.
Introduction
Saudi is expected to grow at 6.0% y-o-y in 2012 on the back of strong crude oil prices and prudent macroeconomic management according to the International Monetary Fund (IMF). We are in line with the IMF and expecting Saudi's real gross domestic product (GDP) to remain robust at 6.0% y-o-y in 2012 (2011: 6.8% y-o-y) supported by both oil (contributed 51.0% of GDP in 2010) and non-oil sectors (49.0% of GDP in 2010). The Saudi government has taken advantage of the strong economic outlook to accelerate measures to address important social issues, especially in housing, unemployment and extending the social safety net.
Robust Oil Sector
The oil sector in Saudi is expected to remain strong underpinned by high crude oil production and oil prices. Saudi's crude oil production increased further to 9.8 million bpd in April 2012 from 9.7 million bpd in March 2012. Saudi has the proven reserves, flexible production capacity and robust infrastructure to ensure a reliable and sustainable supply of crude oil and refined products. Saudi is in a sturdy position to deal with any unexpected disruptions in global petroleum supplies.
Saudi has been the world's leading oil producer and exporter and its 265.0 billion barrels of proven reserves (over 19.0% of the world's reserves at end-2010) are sufficient for 72 years' production at around 10.0 million bpd. Industrial sector development is based on the ample availability of hydrocarbon resources and is strongly influenced by developments in the oil industry, with petroleum refining accounting for some 30.0% of manufacturing output. The petrochemicals sector relies for its feedstock on gas, most of which is still associated with crude oil output. Oil revenue has been used to develop agriculture and other industries, including iron and steel, construction materials, food processing, engineering and chemicals. 
9-Month High PMI
Separately, growth in non-oil sectors, particularly construction, manufacturing and wholesale and retail trade, will also remain robust this year, mainly due to strong private and public investment and consumption spending. Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports.
New orders sub-index recorded the highest growth since June 2011 at 70.1 in April 2012 from 66.9 in March 2012. Respondents commented on improved demand conditions and more business from government contracts. Data suggested that the domestic market remained a key driver of new order growth. To accommodate gains in new business, Saudi non-oil private sector firms raised output during April 2012. Output sub-index growth climbed reaching 65.2 in April 2012 from 62.7 in March 2012. In order to keep up with rising business requirements, companies continued to recruit more employees. The employment sub-index rose significantly to 55.8 in April 2012 from 52.5 in March 2012.
Infrastructure sector plays a crucial role for non-oil sector GDP growth in Saudi. Saudi is not only the largest country in the GCC, accounting for over 60.0% of the region's population, but it also continues to experience one of the world's steepest rise in population, increasing from 7.3 million in 1975 to an estimated 28.0 million in 2011. According to the United Nations (UN) estimates, Saudi's total population is forecast to reach more than 30.0 million by 2015. The significant growth in population is generating enormous opportunities for the country's infrastructure development.
Inflationary Pressure Persists
Despite a robust economic growth projection, the IMF warned Saudi authorities to monitor consumer prices carefully before the economy overheats. However, recently Saudi's consumer price index (CPI) based inflation eased to 5.3% y-o-y in April 2012 from 5.4% y-o-y in March 2012 as food and beverages segment (largest contributor of CPI basket at 26.0%) prices eased to 4.3% y-o-y in April 2012 from 5.1% y-o-y in March 2012. Easing food prices in Saudi is in line with moderating global food prices. The decline was largely due to falls in sugar and dairy prices followed by cereals which more than offset strong gains in oils and a slight rise in meat prices.
In addition, prices of transport and communications segment (attributes 16.0% of CPI basket) eased to 1.8% y-o-y in April 2012 from 2.2% y-o-y in March 2012 as the Saudi government continued to subsidize fuel which is widely used in the transportation industry. Saudi's fuel subsidies cost approximately around SAR50.0bln annually according to the
Electricity and Cogeneration Regulatory Authority
(ECRA), Saudi's power regulator. Prices of miscellaneous products and services (attributes 13.0% of CPI basket) also moderated to 6.9% y-o-y in April 2012 from 7.1% y-o-y in March 2012 as government kept control on prices of certain goods.
Although Saudi's inflation eased slightly in April 2012, moving forward we believe an upward trend of inflation is expected to continue throughout 2012 with 5.0%-5.5% y-o-y in 1H12 and 6.0%-7.0% in in 2H12 which will yield 6.0% y-o-y in 2012 on average compared with 5.0% y-o-y in 2011. This is mainly driven by strong domestic demand and rising property prices. Moreover, the increased government spending on housing, job creation and social welfare improvement is expected to further add to liquidity and hence contribute to an added rise in inflation. Increasing liquidity signals potential demand-led inflation in future.
Conclusion
We have revised upwards our growth forecast for this year to 6.0% y-o-y from previous estimate of 5.0% y-o-y as Saudi's fiscal and current account remain in surplus. Oil production volumes are expected to stay high for a longer period of time than we had previously assumed and prices have also exceeded expectations. This combination of higher volumes and higher prices are likely to lift Saudi oil export earnings to an all-time high.
Nevertheless, the youth unemployment is projected to remain high due to rapid growth in population. Hence, a need to improve infrastructure and rising social spending will continue to add pressure for high government expenditure.
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