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No respite from high inflation for Gulf states

Dubai, May 4, 2008

Inflation in Saudi Arabia and four other Gulf oil producers will probably soar to at least 9 percent this year as rents and global commodity prices surge and falling interest rates spur lending, a Reuters poll showed.

In dollar-pegged Saudi Arabia and Oman, average inflation may more than double as the weaker US currency makes some imports to the world's biggest oil-exporting region more expensive, according to the poll of 17 economists and analysts.

"The Gulf-wide trend appears to be no relief from high inflation," said Giyas Gokkent, head of research at the National Bank of Abu Dhabi, one of the analysts polled by Reuters between April 27 and May 1.

In Saudi Arabia, the world's largest oil exporter, average inflation could hit at least a 30-year peak of 9 percent, on average, compared with 4.1 percent last year, the poll showed.

Year-end inflation in the largest Arab economy could jump to 9.9 percent, up from 6.5 percent at the end of December 2007.

"The possibility of double-digit inflation across the Gulf does not look too remote now and indeed in the first half of 2008 is clearly a period when price pressures have intensified," Gokkent said.

Economists have at least doubled their 2008 inflation forecasts for Saudi Arabia, Oman, Bahrain and Kuwait since they were last polled by Reuters in December.

Since then, inflation in Saudi Arabia almost doubled in six months to 9.6 percent in March, while price rises hit 11.1 percent in Oman in February, more than two times the inflation rate just eight months earlier.

Oman's average inflation rate will jump to a record 9.3 percent this year, with inflation touching 11 percent on December 31, the poll showed.

It also highlighted rapid price growth in Bahrain, the smallest Gulf economy, where inflation should more than double to 8.5 percent by the end of the year and average 6.1 percent.

"A boom in domestic demand, strong monetary growth, supply bottlenecks, rising international commodity prices and a weak dollar-pegged currency will ensure that inflation remains well-above historical levels," said David Butter, a regional economist at the Economist Intelligence Unit.

Gulf states, bar Kuwait, are constrained in their inflation battle by currency pegs to the ailing dollar, which drive up import costs and force them to track US interest rate cuts.

Plagued by price rises, Gulf governments have boosted subsidies, introduced rent controls, raised state employee salaries, increased welfare payments and slashed import duties to offset the impact of inflation on their populations.

The rising cost of living is fuelling discontent; migrant workers in the United Arab Emirates and Bahrain have already rioted over the erosion of wages due to the weak dollar.

In the UAE and Qatar -- contending with the region's fastest pace of price growth -- inflation will rise slightly in 2008 as housing supply eases pressure on rents in both countries.

Inflation in Qatar -- which froze rents this year to control prices -- will still be the region's highest this year, averaging 13.8 percent, on par with 2007, and easing to 13.3 percent in the fourth quarter.

UAE inflation accelerated to an at least 20-year peak of 11.4 percent last year and will rise slightly to 11.8 percent this year, the poll showed.

"There are no signs of cooling in the UAE property market," said Mark McFarland, chief economist at Dubai-based Naeem.

The Gulf inflationary spiral has raised bets that some oil producers could follow Kuwait and sever their dollar links.

Central banks, though, have tried to defend pegs by raising bank reserve requirements, giving banks less money to lend as most oil producers tracked seven US interest rate cuts since September totalling 3.25 percent.

Inflation in Kuwait, which has allowed its dinar to rise more than 8 percent since severing its peg on M




Tags: UAE | Saudi Arabia | inflation | Gulf |

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