SAUDI ARABIA. Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.
The pegs restrict the Gulf's ability to fight inflation by forcing them to shadow US monetary policy at a time when the Fed is cutting rates to ward off recession and Gulf economies are surging on a near five-fold jump in oil prices since 2002.
Rifts are growing across the world's top oil-exporting region on how to tackle inflation which hit a 27-year peak of 7.0% in Saudi Arabia in January and a 19-year peak of 9.3% in the United Arab Emirates in 2006, the most recent figure.
"In the short term free floating...will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan told an investment conference in Jeddah, Saudi Arabia's second-largest city.
Saudi and UAE central bank chiefs spoke in favor on Monday of retaining dollar pegs, while Qatar's prime minister advocated regional currency reform to avert possible unilateral revaluations designed to curb inflation.
"The economies of the Gulf and the United States are completely out of sync and that is exposing the shortcomings of the dollar peg," said Simon Williams, Middle East economist at HSBC Holdings in Dubai.
"Against a backdrop of inflation, high oil prices and low interest rates the debate over currency reform has to take on greater urgency," he said.
Floating the Saudi Riyal would not be appropriate for an economy that relies on oil exports, Saudi Central Bank Governor Hamad Saud al-Sayyari told Arabiya Television in response to Greenspan's suggestion.
"Floating is beneficial when the economy and exports are diverse....as for the Kingdom it remains reliant on the export of a single commodity," Sayyari said.
Dollar pegs were helping Gulf states attract foreign investments, UAE Central Bank Governor Sultan Nasser Al Suweidi added during a speech in the UAE capital, Abu Dhabi.
"They did very well for our economies because it has led to more capital flows," Suweidi said on Monday.
Still, "Gulf governments should consider the implication of such a move in the long term," Greenspan said of the idea of floating their currencies.
Qatar, contending with the region's highest inflation, is studying revaluing its Riyal among options to combat inflation that hit 13.7% in the fourth quarter, Sheikh Hamad bin Jassim bin Jabr Al Thani told Reuters late on Saturday.
The exchange rate contributes to about 40% of inflation in Qatar, where the Riyal is 30% undervalued, Hamad said.
"We prefer always to act with all the GCC countries," Sheikh Hamad, whose country currently chairs the six nation-Gulf Cooperation Council, said.
"It's now time for the Gulf to have its own currency," he said, adding the Gulf currency should be "like the Japanese yen or other currencies."
Both Qatar and the UAE are likely to sever their links to the US Dollar this year and track currency baskets as Kuwait did last May, Deutsche Bank said last month.
Divergence in Gulf monetary policy widened last May when Kuwait broke ranks with its neighbors by severing its link to the dollar in favour of a basket of currencies, saying a weak dollar was driving imported inflation.
Oman has said it will not join a single currency at all, and Suweidi said in November he was under mounting social and economic pressure to drop the peg.
He has since backtracked, mirroring the position of Saudi Arabia, which has in the last month introduced public sector wage increases, welfare payments and subsidies to offset the impact of inflation.
Inflation in the UAE last year likely rose to 10.9%, National Bank of Abu Dhabi said on Sunday
Thursday, February 28, 2008
Tuesday, February 26, 2008
Qatar calls on Gulf to bridge currency rifts
Reuters Monday February 25 2008 By John Irish
DOHA, Feb 25 (Reuters) - Qatar's prime minister urged Gulf Arab oil producers to bridge differences over a single currency, saying monetary union could avert possible unilateral revaluations designed to check soaring inflation.
Qatar's dollar-pegged riyal is undervalued by as much as 30 percent and currency revaluation is being studied, among several options, to check inflation, Sheikh Hamad bin Jassim bin Jabr al-Thani said in an interview late on Saturday.
Inflation in the richest Arab country by per capita hit 13.74 percent in the fourth quarter.
"It's now the time for the Gulf to have its own currency," Sheikh Hamad said in the Qatari capital, Doha. "We are thinking about it and in talks ... we are discussing with Gulf countries, but there is no consensus."
Qatar, the world's largest exporter of liquefied natural gas, would prefer to make any change to its currency policy in concert with Saudi Arabia and its other Gulf Arab partners preparing for monetary union as early as 2010, Sheikh Hamad said.
"We prefer always to act with all the GCC countries," said Sheikh Hamad, whose country currently chairs the six-nation Gulf Cooperation Council that includes the United Arab Emirates and Kuwait.
Asked how long Qatar could continue with its existing foreign exchange regime, he said: "We cannot give a time. It is something that we have to see how it goes and look at where the dollar is going."
Dollar pegs force Gulf oil producers to shadow U.S. monetary policy at a time when the Federal Reserve is cutting rates to ward off recession and the Gulf economies are booming on a near five-fold jump in oil prices since 2002.
Rifts in Gulf monetary policy widened in May when Kuwait broke ranks with its neighbours by severing its dollar peg in favour of a basket of currencies, saying a weak dollar was driving imported inflation.
Oman has said it will not join a single currency at all, and United Arab Emirates Central Bank Governor Sultan Nasser al-Suweidi said in November he was under mounting social and economic pressure to drop the peg.
The GCC, created in 1981 initially as a defensive bloc against Iran, "should have a currency with a good weight internationally," Sheikh Hamad said. "The GCC now is capable to do this and have a separate currency."
The exchange rate contributes to about 40 percent of inflation in Qatar, Sheikh Hamad said.
"It's undervalued by 30 percent," he said of the riyal. "We are still studying how to deal with this matter."
Qatar will complete a study on how to address foreign exchange weakness and inflation in a "few months", Sheikh Hamad said.
(Reporting by John Irish; Editing by James Cordahi and Neil Fullick)
DOHA, Feb 25 (Reuters) - Qatar's prime minister urged Gulf Arab oil producers to bridge differences over a single currency, saying monetary union could avert possible unilateral revaluations designed to check soaring inflation.
Qatar's dollar-pegged riyal is undervalued by as much as 30 percent and currency revaluation is being studied, among several options, to check inflation, Sheikh Hamad bin Jassim bin Jabr al-Thani said in an interview late on Saturday.
Inflation in the richest Arab country by per capita hit 13.74 percent in the fourth quarter.
"It's now the time for the Gulf to have its own currency," Sheikh Hamad said in the Qatari capital, Doha. "We are thinking about it and in talks ... we are discussing with Gulf countries, but there is no consensus."
Qatar, the world's largest exporter of liquefied natural gas, would prefer to make any change to its currency policy in concert with Saudi Arabia and its other Gulf Arab partners preparing for monetary union as early as 2010, Sheikh Hamad said.
"We prefer always to act with all the GCC countries," said Sheikh Hamad, whose country currently chairs the six-nation Gulf Cooperation Council that includes the United Arab Emirates and Kuwait.
Asked how long Qatar could continue with its existing foreign exchange regime, he said: "We cannot give a time. It is something that we have to see how it goes and look at where the dollar is going."
Dollar pegs force Gulf oil producers to shadow U.S. monetary policy at a time when the Federal Reserve is cutting rates to ward off recession and the Gulf economies are booming on a near five-fold jump in oil prices since 2002.
Rifts in Gulf monetary policy widened in May when Kuwait broke ranks with its neighbours by severing its dollar peg in favour of a basket of currencies, saying a weak dollar was driving imported inflation.
Oman has said it will not join a single currency at all, and United Arab Emirates Central Bank Governor Sultan Nasser al-Suweidi said in November he was under mounting social and economic pressure to drop the peg.
The GCC, created in 1981 initially as a defensive bloc against Iran, "should have a currency with a good weight internationally," Sheikh Hamad said. "The GCC now is capable to do this and have a separate currency."
The exchange rate contributes to about 40 percent of inflation in Qatar, Sheikh Hamad said.
"It's undervalued by 30 percent," he said of the riyal. "We are still studying how to deal with this matter."
Qatar will complete a study on how to address foreign exchange weakness and inflation in a "few months", Sheikh Hamad said.
(Reporting by John Irish; Editing by James Cordahi and Neil Fullick)
Saturday, February 23, 2008
Saudi Arabia in the grip of surging inflation
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures. Official figures showed inflation in the world’s oil powerhouse hit a record 4.1% in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE. Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
"There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates", said Ihsan bu Hulaiga, a well-known Saudi economist. "Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007. Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3%. Rents, house renovations, fuel and water prices shot up by 8.1% and medical care by 4.9%. In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2% in 2006 and only 0.7% in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades. Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9% between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures. In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation. "Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states", said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation. "Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices", it said in a study. Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE. Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
"There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates", said Ihsan bu Hulaiga, a well-known Saudi economist. "Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007. Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3%. Rents, house renovations, fuel and water prices shot up by 8.1% and medical care by 4.9%. In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2% in 2006 and only 0.7% in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades. Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9% between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures. In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation. "Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states", said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation. "Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices", it said in a study. Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006
Wednesday, February 20, 2008
No Magic Solution for Inflation, Says Al-Assaf
No Magic Solution for Inflation, Says Al-Assaf
P.K. Abdul Ghafour, Arab News
Ibrahim Al-Assaf
JEDDAH — “There is no magic solution to the problem of inflation,” Finance Minister Dr. Ibrahim Al-Assaf said yesterday. He underscored the recent measures taken by the government, such as pay hike and subsidy for essential commodities to offset the impact of inflation.
The minister made this comment during a meeting with the 150-member consultative Shoura Council in Riyadh.
Osama Abu Gharara, deputy chairman of the council’s finance committee, said Al-Assaf had not spoken about revaluation of Saudi riyal against a declining US dollar.
However, Hamad Al-Sayari, governor of Saudi Arabian Monetary Agency (SAMA), who also attended the Shoura meeting, downplayed the effect of riyal-dollar peg on the Kingdom’s inflation that reached a record high of 6.5 percent last December.
“The riyal-dollar peg has not much effect on the problem of inflation. All exports of Saudi Arabia and other Gulf countries are in dollars and most developing countries use dollar in trade. Moreover, shipping and insurance expenditures are also calculated in dollars,” he explained.
Shoura Council Chairman Dr. Saleh Bin-Humaid said the council wanted an explanation from the minister on the purchasing power of Saudi riyal, future of the GCC currency union, oil prices, stock market situation and the measures taken by the state to contain inflation.
“Minister Al-Assaf told the meeting that the problem of inflation now exists in all countries. He also explained the economic policies taken by his ministry in this regard,” the Saudi Press Agency said quoting Ahmed Al-Yahya, assistant secretary-general of the Shoura.
Al-Assaf told the meeting that government’s direct subsidy for essential commodities such as flour, rice and baby milk in addition to indirect subsidies to many other products would help offset increasing cost of living caused by rising prices.
Speaking about the housing crunch and growing rents, the minister said the Real Estate Development Fund was providing citizens up to SR300,000 to build houses. “We know that this amount is not enough due to rising prices but people should find suitable means to complete their houses,” he added.
Al-Assaf denied allegations that his ministry was delaying payments to contractors. “We are now revising our relations with other government departments and developing electronic infrastructure to speed our work,” he added. He said Saudi Arabia’s taxation system was one of the best in the world.
On his part, Al-Sayari blamed growing inflation on the increasing demand for services. “The rate of inflation differs from one Saudi city to another,” he added.
He said the Ministry of Finance does not interfere in SAMA’s affairs. “SAMA is totally an independent institution.”
Al-Sayari said SAMA had given license to 10 foreign banks to operate in the Kingdom. He urged Saudi banks not to deduct more than one-third of salary from people who have taken loans and more than one-fourth of salary from pensioners. “If they do otherwise it would be a violation of the rule.”
Ihsan Bu-Hulaiga, chairman of the Shoura’s finance committee, said yesterday’s meeting with Al-Assaf examined the Kingdom’s monetary and foreign exchange policies. He objected to taking “hasty” actions in order to tackle inflation. “Instead, these issues should be dealt with by thoroughly examining all options that are available... not just foreign exchange reform,” he told Reuters.
Mohammed Al-Jasser, deputy governor of SAMA, said last month that it would take a “precipitous” decline in the dollar for Saudi Arabia to consider revaluing the riyal. A weaker riyal makes imports more expensive.
Kuwait has allowed its dinar to rise almost six percent since it broke ranks with its neighbors in May and severed the dinar’s link to the dollar to track a currency basket partly to help contain imported inflation.
P.K. Abdul Ghafour, Arab News
Ibrahim Al-Assaf
JEDDAH — “There is no magic solution to the problem of inflation,” Finance Minister Dr. Ibrahim Al-Assaf said yesterday. He underscored the recent measures taken by the government, such as pay hike and subsidy for essential commodities to offset the impact of inflation.
The minister made this comment during a meeting with the 150-member consultative Shoura Council in Riyadh.
Osama Abu Gharara, deputy chairman of the council’s finance committee, said Al-Assaf had not spoken about revaluation of Saudi riyal against a declining US dollar.
However, Hamad Al-Sayari, governor of Saudi Arabian Monetary Agency (SAMA), who also attended the Shoura meeting, downplayed the effect of riyal-dollar peg on the Kingdom’s inflation that reached a record high of 6.5 percent last December.
“The riyal-dollar peg has not much effect on the problem of inflation. All exports of Saudi Arabia and other Gulf countries are in dollars and most developing countries use dollar in trade. Moreover, shipping and insurance expenditures are also calculated in dollars,” he explained.
Shoura Council Chairman Dr. Saleh Bin-Humaid said the council wanted an explanation from the minister on the purchasing power of Saudi riyal, future of the GCC currency union, oil prices, stock market situation and the measures taken by the state to contain inflation.
“Minister Al-Assaf told the meeting that the problem of inflation now exists in all countries. He also explained the economic policies taken by his ministry in this regard,” the Saudi Press Agency said quoting Ahmed Al-Yahya, assistant secretary-general of the Shoura.
Al-Assaf told the meeting that government’s direct subsidy for essential commodities such as flour, rice and baby milk in addition to indirect subsidies to many other products would help offset increasing cost of living caused by rising prices.
Speaking about the housing crunch and growing rents, the minister said the Real Estate Development Fund was providing citizens up to SR300,000 to build houses. “We know that this amount is not enough due to rising prices but people should find suitable means to complete their houses,” he added.
Al-Assaf denied allegations that his ministry was delaying payments to contractors. “We are now revising our relations with other government departments and developing electronic infrastructure to speed our work,” he added. He said Saudi Arabia’s taxation system was one of the best in the world.
On his part, Al-Sayari blamed growing inflation on the increasing demand for services. “The rate of inflation differs from one Saudi city to another,” he added.
He said the Ministry of Finance does not interfere in SAMA’s affairs. “SAMA is totally an independent institution.”
Al-Sayari said SAMA had given license to 10 foreign banks to operate in the Kingdom. He urged Saudi banks not to deduct more than one-third of salary from people who have taken loans and more than one-fourth of salary from pensioners. “If they do otherwise it would be a violation of the rule.”
Ihsan Bu-Hulaiga, chairman of the Shoura’s finance committee, said yesterday’s meeting with Al-Assaf examined the Kingdom’s monetary and foreign exchange policies. He objected to taking “hasty” actions in order to tackle inflation. “Instead, these issues should be dealt with by thoroughly examining all options that are available... not just foreign exchange reform,” he told Reuters.
Mohammed Al-Jasser, deputy governor of SAMA, said last month that it would take a “precipitous” decline in the dollar for Saudi Arabia to consider revaluing the riyal. A weaker riyal makes imports more expensive.
Kuwait has allowed its dinar to rise almost six percent since it broke ranks with its neighbors in May and severed the dinar’s link to the dollar to track a currency basket partly to help contain imported inflation.
Saudi Arabia in the grip of surging inflation
Saudi Arabia in the grip of surging inflation
By Nadim Kawach on Sunday, February 17 , 2008
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures.
Official figures showed inflation in the world’s oil powerhouse hit a record 4.1 per cent in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE.
Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
“There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates,” said Ihsan bu Hulaiga, a well-known Saudi economist.
“Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007.
Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3 per cent. Rents, house renovations, fuel and water prices shot up by 8.1 per cent and medical care by 4.9 per cent.
In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2 per cent in 2006 and only 0.7 per cent in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades.
Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9 per cent between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures.
In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation.
“Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states,” said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation.
“Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices,” it said in a study.
Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006.
By Nadim Kawach on Sunday, February 17 , 2008
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures.
Official figures showed inflation in the world’s oil powerhouse hit a record 4.1 per cent in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE.
Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
“There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates,” said Ihsan bu Hulaiga, a well-known Saudi economist.
“Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007.
Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3 per cent. Rents, house renovations, fuel and water prices shot up by 8.1 per cent and medical care by 4.9 per cent.
In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2 per cent in 2006 and only 0.7 per cent in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades.
Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9 per cent between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures.
In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation.
“Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states,” said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation.
“Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices,” it said in a study.
Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006.
Geopolitical risks to hit Abu Dhabi’s rating
Geopolitical risks to hit Abu Dhabi’s rating
By Matt Smith on Tuesday, February 12 , 2008
Geopolitical risks will prevent Abu Dhabi from increasing its credit rating in the immediate future, a senior analyst from global rating agency Standard & Poor’s (S&P) has warned.
Abu Dhabi is currently rated AA by S&P, which is two levels below the highest possible rating.
“We are already incorporating all Abu Dhabi’s strengths, particularly its fundamental wealth and asset positions,” said Farouk Soussa, Standard & Poor’s team leader of Middle East ratings.
“Abu Dhabi would have to address the current constraints to increase its rating and these are mainly geopolitical risks in the region, as well the relative lack of diversity in its economy.
“If pressures with Iran and tensions in Iraq ease, then we could see the ratings improving.” Soussa was speaking at the official opening of S&P’s Middle East headquarters at the Dubai International Finance Centre.
The US analysts currently provide ratings on 100 public and private sector entities across six Gulf countries, including the emirates of Abu Dhabi and Ras Al Khaimah. The latter was assigned an ‘A’ long-term and ‘A-1’ short-term foreign and local currency rating in January.
Global sukuk sales are likely to top $100 billion (Dh367bn) by the end of 2009, according to Jan Plantagie, S&P regional manager for the Middle East.
He said a “huge pipeline” of sukuks – Shariah-complaint bonds – will be launched either in the second half of this year or early in 2009.
International credit agencies such as S&P and Moody’s have been criticised for their role in the ongoing US sub-prime crisis, with many analysts saying they waited too long to cut the ratings of mortgage-backed bonds, and that they failed to adequately evaluate the risks inherent in sub-prime debt.
In response, S&P has announced 27 directives to increase transparency and improve information disclosure to investors.
S&P is part of a growing band of sceptics doubting whether a GCC monetary union can be achieved by the official 2010 deadline.
“This date looks very ambitious and we think it will be later than that. Kuwait has dropped its dollar peg, which makes it more complicated, while there are technical and political issues to be solved,” said Soussa.
Real estate has been a prime driver of Dubai’s economic boom, with property prices enjoying mega growth, but Soussa admits the bubble could yet burst.
He said: “A concern would be if the global slowdown results in a decrease in economic activity and so the number of expats relocating to the GCC, which is currently the main driver of demand, declines.
“But the construction boom of the GCC is very different from any experienced in the West.”
GCC sovereign wealth funds (SWFs) are refocusing their investments on their native region because opportunities in Western markets are diminishing. Soussa said: “Pursuing the best return means looking inside the GCC as well. The second reason is there’s now a greater capacity to absorb funds [in the GCC] and therefore more opportunities for development and so SWFs are looking inward as well.”
Soussa refused to comment on whether S&P will be rating Dubai in the near future. However, he praised the transparency of the region’s governments in supplying information on which to base its ratings, but admitted the quality of data was sometimes lacking.
Soussa added: “There’s room for improvement in terms of quality and breadth of information. This doesn’t affect our ability to complete our ratings, which are driven first by the government’s financial position and there is ample data on that.”
Net borrowing to reach $23bn
Net borrowing by Middle Eastern and African rated sovereigns may reach as much as $23 billion (Dh84.41bn) in 2008, a sharp increase from $7bn last year, according to Standard & Poor’s.
The hike is “due to a reduction in debt repayments and a rise in sovereign borrowing requirements”, S&P said in its fourth annual regional sovereign issuance survey. Despite the increase in borrowing, total new debt accounts for just 1.1 per cent of the combined GDP of the rated sovereigns.
The ratings agency “expects rated Middle Eastern and African sovereigns’ commercial medium and long-term borrowing to be $77.6bn in 2008, up from the $57bn borrowed in 2007. Of this, the vast majority, $54.2b, is required to refinance existing maturing debt, with the remaining $23.4bn reflecting new debt”.
By Matt Smith on Tuesday, February 12 , 2008
Geopolitical risks will prevent Abu Dhabi from increasing its credit rating in the immediate future, a senior analyst from global rating agency Standard & Poor’s (S&P) has warned.
Abu Dhabi is currently rated AA by S&P, which is two levels below the highest possible rating.
“We are already incorporating all Abu Dhabi’s strengths, particularly its fundamental wealth and asset positions,” said Farouk Soussa, Standard & Poor’s team leader of Middle East ratings.
“Abu Dhabi would have to address the current constraints to increase its rating and these are mainly geopolitical risks in the region, as well the relative lack of diversity in its economy.
“If pressures with Iran and tensions in Iraq ease, then we could see the ratings improving.” Soussa was speaking at the official opening of S&P’s Middle East headquarters at the Dubai International Finance Centre.
The US analysts currently provide ratings on 100 public and private sector entities across six Gulf countries, including the emirates of Abu Dhabi and Ras Al Khaimah. The latter was assigned an ‘A’ long-term and ‘A-1’ short-term foreign and local currency rating in January.
Global sukuk sales are likely to top $100 billion (Dh367bn) by the end of 2009, according to Jan Plantagie, S&P regional manager for the Middle East.
He said a “huge pipeline” of sukuks – Shariah-complaint bonds – will be launched either in the second half of this year or early in 2009.
International credit agencies such as S&P and Moody’s have been criticised for their role in the ongoing US sub-prime crisis, with many analysts saying they waited too long to cut the ratings of mortgage-backed bonds, and that they failed to adequately evaluate the risks inherent in sub-prime debt.
In response, S&P has announced 27 directives to increase transparency and improve information disclosure to investors.
S&P is part of a growing band of sceptics doubting whether a GCC monetary union can be achieved by the official 2010 deadline.
“This date looks very ambitious and we think it will be later than that. Kuwait has dropped its dollar peg, which makes it more complicated, while there are technical and political issues to be solved,” said Soussa.
Real estate has been a prime driver of Dubai’s economic boom, with property prices enjoying mega growth, but Soussa admits the bubble could yet burst.
He said: “A concern would be if the global slowdown results in a decrease in economic activity and so the number of expats relocating to the GCC, which is currently the main driver of demand, declines.
“But the construction boom of the GCC is very different from any experienced in the West.”
GCC sovereign wealth funds (SWFs) are refocusing their investments on their native region because opportunities in Western markets are diminishing. Soussa said: “Pursuing the best return means looking inside the GCC as well. The second reason is there’s now a greater capacity to absorb funds [in the GCC] and therefore more opportunities for development and so SWFs are looking inward as well.”
Soussa refused to comment on whether S&P will be rating Dubai in the near future. However, he praised the transparency of the region’s governments in supplying information on which to base its ratings, but admitted the quality of data was sometimes lacking.
Soussa added: “There’s room for improvement in terms of quality and breadth of information. This doesn’t affect our ability to complete our ratings, which are driven first by the government’s financial position and there is ample data on that.”
Net borrowing to reach $23bn
Net borrowing by Middle Eastern and African rated sovereigns may reach as much as $23 billion (Dh84.41bn) in 2008, a sharp increase from $7bn last year, according to Standard & Poor’s.
The hike is “due to a reduction in debt repayments and a rise in sovereign borrowing requirements”, S&P said in its fourth annual regional sovereign issuance survey. Despite the increase in borrowing, total new debt accounts for just 1.1 per cent of the combined GDP of the rated sovereigns.
The ratings agency “expects rated Middle Eastern and African sovereigns’ commercial medium and long-term borrowing to be $77.6bn in 2008, up from the $57bn borrowed in 2007. Of this, the vast majority, $54.2b, is required to refinance existing maturing debt, with the remaining $23.4bn reflecting new debt”.
Saudi to discuss riyal revaluation, combating inflation
Author: BI-ME staff
Source: BI-ME and agencies
Published: 17 February 2008
SAUDI ARABIA. The 150-member Shoura Council that advises the king, will discuss on Sunday the revaluation of the Saudi riyal against the US dollar, rising inflation and the GCC common currency.
Finance Minister Dr. Ibrahim Al-Assaf, Dr. Osama Abu Gharara, deputy chairman of the Financial Committee at the Shoura Council and Hamad Saud Al Sayyari, governor of the Saudi Arabian Monetary Agency will be present at the meeting.
“So far we have not seen any solution to control inflation,” Abu Gharara told Al-Eqtisadiah business daily. Inflation in the Kingdom surged to a record high of 6.5% last December.
Inflation is partly driven by a rise in global commodity prices and the weak US currency.
“We’ll also discuss the possibility of revaluing the riyal against the dollar in tune with its devaluation against other international currencies,” the Shoura member said. He emphasized the need for reviewing the riyal’s exchange rate with the falling American dollar.
"Revaluing the currency is a possible way to face inflation and it will be one of the solutions the council will present today," Abu Gharara was quoted as saying in the pan-Arab daily Asharq Al-Awsat.
The Shura Council can review draft legislation and make recommendations, but these are not binding on the government.
Saudi Arabia has been trying offset the impact of price rises on its 25 million people through measures including a plan announced last month to raise wages, welfare payments and subsidies.
Like most of its neighbours in the world's biggest oil-exporting region, Saudi Arabia's dollar peg means it is forced to track US monetary policy at a time when the Federal Reserve is cutting interest rates to help ward off recession.
Inflation has overtaken official borrowing costs in the largest Arab economy, where the central bank raised bank reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth.
Saudi policymakers have repeatedly said the largest Arab economy would not sever its dollar link.
"I don't think that dropping the peg is a magical solution to curb inflation as there are neighbouring countries that changed the peg and their inflation reached record highs," Abu Gharara said, in reference to Kuwait.
The Saudi riyal hit a two-month high of 3.73 against the dollar last week.
Source: BI-ME and agencies
Published: 17 February 2008
SAUDI ARABIA. The 150-member Shoura Council that advises the king, will discuss on Sunday the revaluation of the Saudi riyal against the US dollar, rising inflation and the GCC common currency.
Finance Minister Dr. Ibrahim Al-Assaf, Dr. Osama Abu Gharara, deputy chairman of the Financial Committee at the Shoura Council and Hamad Saud Al Sayyari, governor of the Saudi Arabian Monetary Agency will be present at the meeting.
“So far we have not seen any solution to control inflation,” Abu Gharara told Al-Eqtisadiah business daily. Inflation in the Kingdom surged to a record high of 6.5% last December.
Inflation is partly driven by a rise in global commodity prices and the weak US currency.
“We’ll also discuss the possibility of revaluing the riyal against the dollar in tune with its devaluation against other international currencies,” the Shoura member said. He emphasized the need for reviewing the riyal’s exchange rate with the falling American dollar.
"Revaluing the currency is a possible way to face inflation and it will be one of the solutions the council will present today," Abu Gharara was quoted as saying in the pan-Arab daily Asharq Al-Awsat.
The Shura Council can review draft legislation and make recommendations, but these are not binding on the government.
Saudi Arabia has been trying offset the impact of price rises on its 25 million people through measures including a plan announced last month to raise wages, welfare payments and subsidies.
Like most of its neighbours in the world's biggest oil-exporting region, Saudi Arabia's dollar peg means it is forced to track US monetary policy at a time when the Federal Reserve is cutting interest rates to help ward off recession.
Inflation has overtaken official borrowing costs in the largest Arab economy, where the central bank raised bank reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth.
Saudi policymakers have repeatedly said the largest Arab economy would not sever its dollar link.
"I don't think that dropping the peg is a magical solution to curb inflation as there are neighbouring countries that changed the peg and their inflation reached record highs," Abu Gharara said, in reference to Kuwait.
The Saudi riyal hit a two-month high of 3.73 against the dollar last week.
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