Average consumer inflation moderated to 5 percent in 2011 from 5.3 percent in the previous year. "As global inflation is expected to moderate and domestic components are unlikely to exert any upward pressure, we continue with our earlier inflation forecast of 4.3 percent for 2012," Al-Rajhi Capital said.

On credit and monetary front, money supply growth remains on its broader trend of moderation after peaking in April last year. Credit from commercial banks to private sector has further accelerated.

Reserve assets of SAMA (Saudi Arabian Monetary Agency) exceeded SR2trillion in December.

According to preliminary estimates by OPEC, crude production in Saudi Arabia increased to an average of 9.29 million barrel per day (mbpd) in 2011, an increase of 12 percent from the average daily production in 2010. This was the highest average daily production since 2005 when the country produced an average 9.35 mbpd. However, average crude price in 2005 was almost half of the average price in 2011. Average crude price was at record high last year as Arab Lights ended the year with an average of $107 per barrel, 39 percent higher than the average price in 2010. Average of both Brent and WTI prices were also at highest ever at $111.3 per barrel and $95 per barrel respectively. High crude production coupled with record prices has boosted growth in oil sector and provided support to nonoil sector, the report said.
 
Inflation

Inflation ends the year 2011 with an uptick in December. It moved to 5.3 percent year-on-year in the month compared to 5.2 percent year-on-year in November. The uptick was due to increase in "fabric, clothing and footwear" which jumped from 0.9 percent in November to 2.1 percent in December coupled with slight increase in "home furniture" and "other expenses and services". Increase in these components negated moderation in "food and beverages" which declined from 4.2 percent in November to 4 percent in December. "Renovation, rent, fuel and water" component continues to grow at 8 percent for the last three months.

Average inflation in the year 2011 moderated to 5 percent compared to 5.3 percent in 2010. All major components eased in 2011 compared to 2010 except "other expenses and service". Average increase in "food and beverages" component, which constitutes 26 percent of the inflation index, moderated from 6.2 percent in 2010 to 5.2 percent in 2011 whereas average increase in "rent, renovation and fuel and water" moderated from 9.4 percent to 7.8 percent. "Home furniture" component eased from 2.8 percent to 0.6 percent during the same period. On the other side, average rise in "other expenses and services" component accelerated from 7.4 percent in 2010 to 8.9 percent in 2011. The increase in cost of "transport and telecommunication" and "education and entertainment" also accelerated though moderately in 2011, the Al-Rajhi Capital report said.

The characteristics of inflation have undergone a structural change over last decade as it exhibits higher global linkages. The correlation coefficient between inflation in Saudi Arabia and global inflation is negative at -13 percent during 1980-2011. The coefficient was positive during 1980-89 at 43 percent which declined to 11 percent during 1990-99. However, the coefficient is sufficiently high at 61 percent during 2002-2011 which shows that inflation in the country has got linked to global price conditions at a stronger level. The report said Inflation has higher degree of linkage with global food and beverage price index as correlation coefficient between inflation in Saudi Arabia and global food and beverages price index is 50 percent during 1981-2011.

With rising linkage to global inflationary situation, volatility has also increased during the last decade. Standard deviation during the period 1980-1989 was 2.5 percent which declined to 2.1 percent during 1990-1999. Decrease in standard deviation coincides with decline in correlation coefficient. However, the standard deviation increased to 3.1 percent during 2002-2011.

Al-Rajhi Capital continues with its earlier forecast of inflation to average 4.3 percent in 2012.
 
Money supply growth

The report said broader trend in money is back to growth. M1 growth slowed to 21.6 percent year-on-year in December compared to 22.4 percent year-on-year in the previous month. The slowdown was mainly due to decline in growth in demand deposits which slowed a tad from 22.1 percent year-on- year in November to 20.9 percent year-on-year in December. Time and savings deposits increased in December leading to faster growth in M2. The deposits grew 2.4 percent year-on-year in December compared to a decline of 2.4 percent year-on-year in the previous month.

M3 growth was also faster due to increase in M2 and quasi monetary deposits. Therefore, M3 growth increased from 12.4 percent year-on-year to 13.2 percent year-on-year during the period.
 
Credit growth

Credit to private sector by commercial banks maintained the same level of growth in December. Bank's claims on private sector grew 10.7 percent in 2011. Banks credit grew by 11 percent last year. However, growth in banks' investment in private securities has been slowing down since June last year. The growth in the investment was only 2.7 percent in 2011.
 
SAMA reserve assets

Total reserve assets continued to grow in December to reach at SR2.03 trillion ($541 billion) in the end of 2011 which was higher by 21.5 percent compared to 2010. Reserve position in the IMF jumped 145 percent year-on-year in December. Two large components of the total assets, foreign currency and deposits abroad and investment in foreign securities increased 23.8 percent year-on- year and 20.8 percent year-on-year respectively. The continued strong growth in reserve assets reflects the fact that the country's external sector (balance of payment) is in robust shape. The year 2011 is the second best one after 2008 in terms of absolute increase in the reserve assets. There has been net addition of SR360 billion during 2011 compared to SR514 billion in 2008, the Al-Rajhi Capital report said.