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Inflation Falls in World's Top Oil Exporter

Inflation in the world’s top oil exporter Saudi Arabia has slowed to a four-year low of 5 percent in 2011, despite a significant ramp-up in government spending in the wake of the Arab Spring.

Main roads in Riyadh are decorated with national flags and portraits of King Abdullah bin Abdul Aziz of Saudi Arabia on February 21, 2011 amid preparations to welcome the Saudi royal back as he is expected to return home later this week after convalescing in Morocco from operations in New York, according to a source close to the oil-rich Gulf monarchy. AFP PHOTO/FAYEZ NURELDINE (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
Fayez Nureldine
Main roads in Riyadh are decorated with national flags and portraits of King Abdullah bin Abdul Aziz of Saudi Arabia on February 21, 2011 amid preparations to welcome the Saudi royal back as he is expected to return home later this week after convalescing in Morocco from operations in New York, according to a source close to the oil-rich Gulf monarchy. AFP PHOTO/FAYEZ NURELDINE (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)

Economists were at odds over how exactly the increased expenditures would rattle consumer prices, but the latest data came in below the original central bank forecast of 5.8 percent and lower than the 5.3 percent in 2010.

A drop in global food prices was one of the main factors in easing inflationary pressure, a variable that could prove decisive again this year.

“In the short term, the biggest risk is external and centers on food,” Paul Gamble, Head of Research at Jadwa Investment, told CNBC. “Any weather-related supply disruption to key imported crops would affect the Kingdom”.

Month-on-month inflation picked up again in December, rising a tenth of a percent to 5.3 as a result of higher clothing and furniture prices. Overall private consumption continued to increase according to several indicators published by the Saudi Monetary Agency (SAMA), the country’s central bank, with the total value of Point of Sales (POS) transactions up over 28 percent to 7.473 billion Saudi Arabian riyal ($1.993 billion) in the year to November.

Broad money supply (M3) maintained its year-on-year double-digit growth levels at 12.4 percent to reach 1.193 trillion Saudi Arabian riyal ($318.4 billion). Although still far off 2008 peaks, it is a figure analysts are watching closely.

The IMF also wrote in its last update in late September that one potential concern “was the buildup of liquidity in the banking system and the risk that it will translate into much higher credit growth in months to come”.

It forecast inflation to reach 5.3 percent in 2012, and warned that “while a pickup in inflation is likely to be significantly below 2008, several of the key drivers of the 2008 spike are in place”.

Emirates NBD, one of the largest lenders in the region, described Saudi Arabia’s inflation in a research note as “high by regional standards”, and expected only a slight moderation in 2012.

The Finance Ministry estimates that economic growth came in at 6.8 percent last year. Higher oil prices have not only sustained growth, but also helped boost the country’s net foreign assets, jumping over 21 percent to some 1.973 trillion Saudi Arabian riyal ($526.1 billion) by the end of November in comparison to the same period last year.

The reserves provide a crucial buffer to maintain fiscal policies in the event of a negative oil price shock. Saudi Arabia is producing oil at record levels, reaching 9.763 million barrels per day in December, according to OPEC’s most recent report.

SAMA has fewer tools at its disposal for containing inflation than some of its peers due to the country’s peg to the US dollar, in place since 1986. The recent appreciation of the US dollar against some of the other majors has hence had a further deflationary impact. In 2008, with inflation at 30-year highs, calls were growing for the leadership to revalue the riyal to reduce the cost of imports.

As part of a cabinet reshuffle, King Abdullah appointed Fahd bin Abdullah al-Mubarak as the new governor for SAMA. Mohammed Al-Jasser, who served less than three years in the post, was named the new Minister of Economy and Planning.

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