Saudi Arabia's inflation is poised to reach 5.1 percent in 2009 as the weak US dollar pushes up prices in the final months of the year, according to Banque Saudi Fransi on Thursday. “We revised up our estimate for average inflation for 2009 to 5.1 percent,” John Sfakianakis, chief economist at Banque Saudi Fransi, said in a research note. “Price rises could accelerate in the first quarter of 2010 should dollar weakness be sustained over the short term, firming up imported inflation,” the report said. It forecast inflation rate to reach 4.6 in 2010. Saudi inflation peaked at more than 11 percent in July 2008. “We believe the dollar should strengthen somewhat during 2010, but domestic inflation is likely to stay at historically high levels,” Sfakianakis added in the note. The Saudi central bank said on Wednesday that the Kingdom would face inflationary pressures during the fourth quarter but they will be mostly due to seasonal factors. However, the central bank and finance ministry do not issue full inflation forecasts. Inflation in Saudi Arabia rose to an annual 4.4 percent in September from 4.1 percent in August, its first increase in four months, which coincided with the month of Ramadan, which typically increases consumer demand. Moreover, the report said Saudi Arabia's imports are set to face their steepest decline in 15 years in 2009, as slower economic conditions sparked off caution among importers, consumers and risk-averse businesses. However, the report said this is not a uniquely Saudi phenomenon, with World Trade Organization (WTO) data showing global imports fell by almost a third in the second quarter from the year earlier. While confidence and stability are showing signs of gradually returning to the Saudi economy, the latest import data provide us with evidence that the pace of growth and appetite for risk will be measured at best. We expect the value of Saudi imports to decline to $89 billion in 2009 - a drop of almost 12 percent from a record $100.6 billion in 2008, marking the biggest decrease since 1994. At a time when consumer spending is subdued compared with last year, we think retailers are hesitant to import large consignments at a higher cost. The recent cycle of dollar weakness that pushed the greenback to a 14-month low versus the euro last month is passing through to Saudi imports and will have a knock-on effect on the wider economy. Prolonged dollar weakness could make imports more pricy in the final months of 2009, leading some importers to hold back on replenishing stocks until they are certain that momentum has returned to economic recovery. “While exports fall and imports wane, we expect the kingdom to pull off a small current account surplus of SR12.8 billion this year, its smallest in a decade. For 2010, we are optimistic but guarded about an economic recovery in the world's largest oil exporter as a result of the most- recent data on private sector credit, which point to a cautious, subdued improvement in the non-oil economy in the coming quarters.” A full-fledged business cycle recovery is inexorably tied to a take off in credit, which will take time, the bank report further said. Next year's private sector recovery is likely to take a more prolonged, U-shaped route, not a V-shaped recovery that would see the businesses rebound in as quickly as one quarter. “This is positive considering evidence that the United States faces a more protracted economic recovery fraught with unemployment, while risks for the creation of a global asset price bubble are becoming more pronounced.” The report also said Saudi Arabia looks poised to witness a downturn in religious tourism, an important contributor to non-oil GDP. “Saudi Arabia is contending with two forces that will drag on 2009 visitor numbers: global recession that has hit worldwide tourism and the H1N1 flu, or swine flu, which has sparked fears about a rapid spread of the infection during the largest annual pilgrimage in the world.” Globally, tourist arrivals fell 7 percent between January and July, according to the World Tourism Organization, and the Middle East region has been caught in the current. Between February and June, tourist nights by inbound visitors to Saudi Arabia dropped 45 percent and total tourist trips by foreigners dropped 41 percent, according to data of the kingdom's Tourism Information and Research Centre (MAS Center). Expenditures by inbound tourists also fell by 15 percent over the five months. While the Saudi economy is set to recover in 2010 it is unlikely to reach full trend growth. We maintain our forecast that the non-oil private sector should grow by 4 percent in 2010, but this will hinge on two interlinked factors: the private sector's enthusiasm to expand and invest after a slow 2009 and the appetite of banks to lend. The report likewise forecast a slow private businesses recovery and “we expect the recovery in 2010 will take a more prolonged, U-shaped route, not a V-shaped recovery that would see the private sector rebound in as quickly as one quarter.” The state's stimulatory spending program is healthy, enabling the Kingdom to move toward recovery without generating debt - very unlike debt-burdened economies of the United States and Europe. Oil prices guide investor sentiment in the Kingdom, with higher prices improving business confidence among private investors. Confidence is returning to the Kingdom as oil prices rallied to an average of almost $73 a barrel for the month of October. “With revenues from the export of crude contributing almost 90 percent to government coffers, the oil price rise has reaffirmed our view that the Kingdom will comfortably post a small budget surplus this year,” the report said.
