Saudi average annual inflation likely to reach 3.9% this year

Updated 25 February 2016
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Saudi average annual inflation likely to reach 3.9% this year

JEDDAH: Saudi Consumer Price Index (CPI), which reflects movements in the cost of living, accelerated sharply to 4.3 percent year-on-year in January, its highest in 5 years, as higher energy prices contributed to a significant rise in the housing and utilities, and transport segments, according to a research report.

“We anticipate domestic inflationary pressure to intensify during the year, driven by second-round effects stemming from the recent energy price reforms,” said economic researchers from Jadwa Investment.
Higher energy and transport costs for other business should somehow lead to higher prices for consumer goods, which will put pressure on other components of the CPI basket, stated Jadwa’s Inflation Update: January 2016.
But the economists said they expect the government to increase its monitoring of any unjustified increases in prices of basic foodstuffs and commodities.
The Ministry of Commerce and Industry (MCI) already carries out inspection rounds and takes legal procedures against any price violations or manipulative activities, all of which will likely be intensified to ensure that prices remain stable.
“We also expect that higher energy prices will likely have a negative impact on consumer spending, in the form of lower disposable income, which would reduce any price pressures on other commodities,” said the report.
“We maintain our expectation that the steady increase in the housing inflation rate will continue, driven mainly by strong domestic demand for housing units,” said the economists.
“We expect external factors’ contribution to inflation to remain subdued, particularly given a strengthening US dollar and the weaker prospects of global economic growth, leading to lower cost for imports and foodstuffs,” they added.
“The combination of these factors together with an expected continuation in the slowdown of the core index lead us to maintain our estimates for average annual inflation to 3.9 percent for 2016,” said the Jadwa researchers.
According to the Inflation Update, the recent reform to energy prices meant that housing and utilities and transport were the main sources of inflation as they accelerated sharply in January, both in year-on-year and monthly terms.
“Our estimate of core inflation, which excludes food and rent and other housing services, but includes transport, rose to its highest level in three years, reaching 3.7 percent year-on-year in January compared to 1.8 percent in December, mainly impacted by the rise in the transport segment. Other components of the core index posted mixed results,” said the report.
As a result of the sharp rise, the contribution of housing-related services toward overall inflation rose from 44 percent in December to 49 percent in January.
Transport saw the largest acceleration among all segments with its contribution rising from just 5 percent in December to 26 percent in January.
The housing and utilities segment rose from 4 percent year-on-year in December to 8.3 percent in January, its highest in six years.
This was a clear result of the recent energy price increases, which impacted electricity and water tariffs, both captured in the electricity and water sub-groups of this segment.
The electricity sub-group rose sharply from just 0.1 percent year-on-year in December to 12 percent in January, while the water sub-group reversed its 14-month deflationary trend to post a 135 percent, year-on-year rise. Month-on-month rises to electricity and water prices were also significant.
The year-on-year change in the rental inflation sub- group reached 4.1 percent in January, slowing from 4.8 percent during the previous month.
Despite rental inflation being the major sub-group of the housing and utilities segment, its slowdown did not prevent the overall segment from rising to its 4-year high.
The core index rose sharply to 3.7 percent, year-on-year in January, up from 2.3 percent in December. Components of the core index recorded mixed performances in January. Transport, which has the third highest weight in the CPI basket, clearly stood out, rising by 12.6 percent year-on-year, compared to 1.3 percent in December, and its highest in 21 years. The rise in the transport component was also a direct result of the increase to fuel prices, which was also significant in month-on-month terms.


World’s biggest sovereign fund worried about trade wars

Updated 55 min 46 sec ago
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World’s biggest sovereign fund worried about trade wars

  • The fund posted a positive return of 1.8 percent, or 167 billion kroner ($19.8 billion), in the second quarter
  • Markets are worried about a trade dispute between the United States and China

OSLO: The managers of Norway’s sovereign wealth fund, the world’s biggest, expressed concern Tuesday about global trade tensions, which could heavily impact its value.
The fund posted a positive return of 1.8 percent, or 167 billion kroner ($19.8 billion), in the second quarter, helping erase a loss of 171 billion kroner in January-March that was attributed to a volatile stock market.
The Government Pension Fund Global, which saw its total value swell to 8.33 trillion kroner by the end of June, manages the country’s oil revenues in order to finance Norway’s generous welfare state when its oil and gas wells run dry.
But Norway’s central bank, which runs the fund, said geopolitical and trade tensions presented a risk.
“It’s fair to say that increased trade barriers or even trade wars will not be beneficial for the fund as a long-term global investor,” Trond Grande, the deputy chief of Norges Bank Investment Management, told reporters.
Markets are worried about a trade dispute between the United States and China. Accusing Beijing of unfair competition, the US administration is considering slapping a new round of levies worth $200 billion on Chinese goods.
Talks between the two slated for Wednesday and Thursday aimed at resolving the dispute have however eased concerns somewhat.
Following US-Turkey tensions that sent the Turkish lira and the Istanbul stock market tumbling, the Norwegian fund said its assets there were worth less than the 23 billion kroner they were at the beginning of the year.
“We’ve seen the market rise for a long time, that there are different political and geopolitical events in the world that can affect the market, and we have to be prepared for the fact that (the value of) the fund can go down a lot,” Grande concluded.
The fund’s strong second quarter was attributed primarily to its share portfolio, which accounts for 66.8 percent of its investments and which rose by 2.7 percent.
Real estate holdings, which account for 2.6 percent of its holdings, rose by 1.9 percent, while bond investments, which represent 30.6 percent, remained flat.
Faced with falling oil revenues in recent years, the Norwegian government has been tapping the fund to finance public spending since 2015. But with oil prices recovering, the fund registered its first inflow in three years in June.