Inflation in the Gulf begins to bite again
Inflation is beginning to rear its head again in certain Gulf countries, some of which only last year were experiencing falling prices.
Though the costs of many durables and rents, a significant component in most inflation baskets, are flatlining, rising food prices are beginning to feed into inflation numbers, economists warn.
Global meat prices hit a 20-year high last month, and the costs of a range of other agricultural products have increased markedly this year. Higher international food prices are particularly noticeable in the Gulf, which imports nearly all of what it eats.
“We’re not going to see inflation at the same level as before the crisis, but food prices are clearly increasing across the Gulf due to global price increases,” says Monica Malik, chief economist at EFG-Hermes, the Egyptian investment bank.
In the Gulf, inflation has important implications for governments, which have to pay more to maintain subsidised prices and support the relationship between populations and ruling families.
In Saudi Arabia, the largest Arab economy, inflation accelerated to 6 per cent year-on-year in July, from 5.5 per cent in June, driven by food and imbalances in the housing market, which mean that rents are still increasing, economists say.
In Kuwait, inflation accelerated to 3.4 per cent in June, from 2.9 per cent in the previous month, also driven by the cost of food. Omani inflation quickened to 3.5 per cent in June, from 3.2 per cent in May.
However, the United Arab Emirates and Qatar are experiencing deflation, as slumping rents counter the effect of higher food prices. Qatar reported prices contracting 2.9 per cent in July, after falling 2.8 per cent the previous month.
The UAE has reported that the official inflation rate was steady at 0.9 per cent in both May and June – but the government’s statistics are widely doubted by economists. Housing constitutes almost 40 per cent of the consumer price index, and rents have slumped across the country, particularly in Dubai.
“The UAE inflation statistics are completely out of sync with what is going on on the ground. I cannot see how the UAE will avoid going into deflation this year,” says a senior economist at an international bank.
The imponderable is whether the trends will continue or prove transient. Forecasts vary, but most economists expect lower rents to moderate overall inflation rates. While there is a slight danger of deflation becoming entrenched in Qatar and the UAE, economists discount the possibility elsewhere.
“The question is whether we will have sustained and widespread deflation – resulting in a downward wage-price spiral – or something more benign,” says Mohamed Jaber, an economist at Morgan Stanley. “Given that UAE and Qatari deflation is linked mainly to one sector – housing – and the fact that the labour force is very flexible, I don’t think it will become a major problem.”
Many economists are more concerned about Saudi Arabia. Food prices in particular tend to rise during the holy month of Ramadan, and the full effect of the jump in international food prices has yet to filter fully into the Saudi statistics, they say. And although the kingdom is attempting to build more affordable housing for its nationals, economists expect rents to keep rising, albeit at a moderate pace.
EFG-Hermes has raised its 2010 inflation forecast for Saudi Arabia to 5.8 per cent, and predicts price increases will quicken to 7.2 per cent next year and 8 per cent in 2012. The bank forecasts that inflation will remain moderate in the UAE and Qatar, but will accelerate in Kuwait and Oman.
While this is a far cry from the almost double-digit inflation in the year preceding the financial crisis, it is disconcertingly high for Saudis, many of whom are poorer than their Gulf neighbours.
“No policymaker wants to see inflationary expectations become entrenched, but the question is what can they do about it. Saudi Arabia isn’t totally powerless, but the roots of the country’s inflation are structural or exogenous,” says Mr Jaber.
The issue of lack of control of monetary policy is marked in Saudi Arabia, as it is in other Gulf states. All peg their currencies to the dollar – except Kuwait which follows a basket dominated by the dollar – and are therefore unable to raise interest rates to moderate inflation. But economists say that unless inflation quickens significantly, Gulf authorities are unlikely to repeg at a higher rate to lower the cost of imports.
Instead, most operate extensive subsidies to ameliorate the negative effects on poorer nationals, such as a blanket subsidy on electricity and sometimes price caps on certain foodstuffs. Several states are investing in overseas agriculture to improve food security.
Economists say that most of the Gulf’s subsidies are inefficient, yet few expect the governments to tamper with them.
“Subsidies are an extremely sensitive topic politically. In the Gulf, inflation can become not just an economic and social problem, but a political one as well,” the international economist says. The government can’t get away with just blaming it on external factors.”