Saudi Spending Fuels Fastest Gulf Inflation: Arab Credit

Saudi Arabian King Abdullah’s spending plan to diversify the economy and keep at bay the protests that have toppled four leaders is helping to fuel the regional Gulf Cooperation Council’s fastest inflation rate.

Inflation in the Arab world’s biggest economy was 3.9 percent in January, up from 3 percent in September. By comparison, inflation in the United Arab Emirates, the next largest economy, was 0.4 percent in January, according to the country’s statistics bureau. Qatari prices advanced 3.4 percent in January.

King Abdullah, who turns 89 this year, promised in the first quarter of 2011 to spend $130 billion on additional subsidies for housing and benefits to avert the unrest that’s swept through the Arab world, leading to civil war in Syria, as well as protests in neighboring Bahrain and in Egypt.

“Inflation is rising because loan growth is finally rising, led by the consumer,” said Emad Mostaque, a London- based strategist at Noah Capital Markets.

The three-month Saudi Interbank Offered Rate, or so-called Saibor, is the only comparable rate to climb in the six-nation GCC since September. The three-month Saibor was unchanged at 0.98500 percent today, up from 0.95625 percent six months ago.

The Saibor’s spread over the London Interbank Offered Rate more than tripled since the start of 2012 to 70 basis points, the widest since January 2009, data compiled by Bloomberg show.

‘Increasing Demand’

Government spending is also increasing demand for Saudi riyals and local assets,” Mostaque said. “This has an inflationary impact.”

The king raised spending by almost a fifth this year to $219 billion as the government builds schools, paves roads and lays rail lines across the desert country.

The spending is part of a broader plan valued at more than $500 billion and is feeding through to economic growth. Saudi Arabia’s $657 billion economy expanded 6.8 percent last year, according to the Finance Ministry, and will outpace growth in the U.A.E. every year until at least 2017, IMF projections show. The economy will grow 4.2 percent in 2013, according to the Washington-based fund.

“Credit growth was directed mainly to projects,” said Abdulwahid Al-Matar, Riyadh-based head of trading at Saudi Hollandi Bank. (AAAL) “It might contribute to inflation, but the biggest chunk of inflation is for rent and food supplies.”

Price Rises

Syria’s agriculture industry is “in tatters” as almost two years of conflict cut vegetable, cereal and fruit output by more than half, the Food & Agriculture Organization said on Jan. 22. Saudi food prices were “aggravated by disruption to supply chains caused by the conflict,” said Paul Gamble, an analyst at Fitch Ratings in London.

Food and rental prices may stabilize, tempering consumer price increases.

“Take a tour in Riyadh and you can see how many new buildings there are,” Al-Matar said.“Housing inflation isn’t at the same magnitude we saw the past few years.”

Saudi Arabia’s central bank governor agrees. “Current inflation is tolerable, and if you compare to other emerging markets we are well below,” Governor Fahad al-Mubarak told reporters on March 3.

Still, consumer prices will average 4.6 percent in 2013, the fastest in the six-member GCC, which also includes the U.A.E., Kuwait, Qatar, Oman and Bahrain, according to the IMF.

Consumer Loans

Consumer loans for cars and equipment increased 20 percent in the second quarter, according to central bank data.

In 2009, the central bank cut the repurchase rate to 2 percent, the lowest since 2004, and the reverse repurchase rate to 0.25 percent. Saudi monetary policy often tracks that of the U.S., where the Federal Reserve’s benchmark interest-rate target has been zero to 0.25 percent since 2008 to support the economy.

“The current interest rate serves financial institutions quite well,” al-Mubarak said. “Lending among banks is very high, which reflects the confidence among banks. The only fear is if it causes overheating to the economy. We don’t see that there is an overheating.”

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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