Saudi Arabia's inflation is likely to drop next year to around 4.5 percent from around 6 percent by end of 2011, Moody's Investor Service said in a study. “We expect inflation to increase to around six percent by year end 2011, from 5.3 percent in September 2011, before subsiding to around 4.5 percent in 2012….the risk of higher inflation remains a primary macroeconomic challenge in Saudi Arabia, particularly given the huge spending packages announced and the lack of monetary policy tools available to contain inflationary pressures,” Moody's said. It said key policy options for the authorities to tackle higher inflation include slowing the pace of government spending or lowering the bank's loan-to-deposit ratio, both of which will affect the business and credit conditions for banks. The report said that despite resilience to short-term oil price fluctuations, the rise in current expenditures, steadily falling oil prices, and lower Saudi oil output, leaves the Kingdom vulnerable to a sustained longer-term decline in oil prices. It noted that during 2010, Saudi Arabia required a fiscal breakeven oil price of around $75/ barrel compared with $65/barrel in 2009, which is higher than other Gulf Cooperation Council (GCC) countries. “We estimate that the breakeven has increased to $80/barrel in 2011.” Moreover, Moody's said higher production and public spending would boost Saudi Arabia's real GDP growth by around 6.5 percent in 2011 before dropping to three percent in 2012, driven by declines in both prices and production. “Despite the massive spending program, Saudi Arabia expects to maintain a budget surplus for 2011 and 2012, owing to government revenues supported by high oil prices and an increase in oil production,” Moody's also said.
