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Saudi Arabia: Rising retail confidence

With strong consumer confidence and a sound economic outlook for the immediate future, Saudi Arabia's retail sector appears set for a good year of trading. Concerns over rising inflation, particularly with Ramadan underway, however, mean that consumers may begin eyeing price tags more carefully.

A series of surveys in recent months have shown that consumer sentiment in Saudi Arabia has remained strong and is indeed improving. In May market research firm Nielsen reported that the consumer confidence index in the Kingdom had increased by six points during the first quarter of 2012 to reach 119.

This makes Saudi Arabia the second-most optimistic market in the world, ranking behind only India. Under the Nielsen system, any score over 100 indicates an optimistic outlook, and Saudi Arabia's continued strong showing put it well ahead of the Middle East average of 97 points.

The latest YouGov-Bayt.com consumer confidence survey, also released in May, echoed Nielsen's findings. More than one-third of those surveyed said their family's overall economic situation had improved in the past three months - a regional high - while 58% said that their expectations for the future of the economy were the same or better as three months prior. Looking ahead, 56% of respondents said their personal financial situation would be better in a year's time, while 48% said the country's economy would be stronger 12 months down the track.

Saudi Arabia also polled strongly in the 12th Global Retail Development Index (GRDI), prepared by international management consultancy AT Kearney. Released in mid-June, the study ranked the Kingdom 14th globally in its assessment of market potential and appeal for retail investment, while also noting Saudi Arabia was the largest single market in the region.

According to the report, Saudi Arabia has strong fundamentals, including a rising GDP, population growth and increased government spending, all of which have reinforced its position in the top 20 of the GRDI. Several international brands have announced expansion plans in anticipation of an increase in Saudi consumer spending as a result of the government's stimulus plan, the study said.

Another recent indication that the sector remained healthy came with the news that the new Al Qasr Mall in Riyadh, the capital's largest shopping centre with a net leasable area of 85,000 sq metres, had seen strong interest from retailers. According to the mall's developer, Dar Al Arkan, some 80% of the new mall's 350 retail units had been leased by the time of the opening in mid-June, with strong interest in the remainder.

Retailers should also be buoyed by the continued expansion in the Saudi economy. Riyadh-based firm Jadwa Investment has estimated that Saudi Arabia's real GDP expanded by about 5.9% in the first quarter of 2012 compared to the same quarter the previous year. Looking further ahead, a forecast prepared by the Samba Financial Group and published in early July projects that GDP will increase by an average of 5% per year between 2012 and 2016.

While there has been some concern that domestic spending by the government could overheat the economy, the same Samba analysis suggested that inflation is expected to remain in check, averaging about 5.5% over the 2012-16 period. Indeed, recent data from Saudi Arabia's Central Department of Statistics show that inflation has started to slow, falling to 5.1% year-on-year as of May, its lowest level in nine months.

But the tariffs on some staples, especially in areas visited by foreign pilgrims during the holy month, having risen by up to 20% as of early July. Whilst these can largely be considered short-term increases, such price hikes will do little to endear the retail sector to the Saudi public or to tourists.

Ramadan is traditionally a growth period for the sector. "Ramadan and the summer time are peak shopping times in the Kingdom, especially in Jeddah," Saud Al Sulaiman, the executive director of IKEA. "The final two weeks of Ramadan are the strongest, after which sales drop off quite sharply as many Saudis and most expats head away for vacation."

Of more significant concern that short-term price increases is the possibility that inflation could be induced by high levels of government spending, although authorities told the IMF in late 2011 that fiscal and monetary policies would be used proactively to contain any inflationary pressures should they materialise.

For now, with inflationary worries seeming to have subsided, the country's retailers will likely be able to benefit from stable economic expansion and opportunities that the Ramadan and Eid market presents.

© Oxford Business Group 2012

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