JEDDAH – Consumer prices in Saudi Arabia recorded an average of 4.5 percent last year as December's rate remained stable at 3.9 percent Y/Y, the National Commercial Bank's “Saudi Economic Review” for the month of February said Saturday. The main driver for inflation is currently food prices which surpassed the category of renovation, rent, fuel and water. The food index climbed 5.1 percent during December despite global prices registering decreases over the fourth quarter of 2012 as the Reuters/Jefferies CRB Index dropped 1.3 percent during the same month. Al Madinah recorded the largest increase across major cities with an annual rate of 12.1 percent, while Jeddah and Riyadh's pace accelerated to 6.3 percent and 5.6 percent Y/Y, respectively. The gain in local food prices could be attributed to the recent weakening of the dollar which drives imported inflation and to a lesser extent the lack of rigid regulations in some local food markets, the report said. NCB forecast that foodstuff category will hover around around 5 percent for the first half of 2013 and expect the inflation rate to jump above 4 percent early 2013 and recording an average of 4.5 percent for the whole year. Moreover, given the utilization of liquidity witnessed recently, the study saw M3 to post an annual gain of 9.1 percent for 2013. Over the course of 2012, the monetary situation reflected the robust economic status of the Saudi economy. The Saudi economy continues to maintain an upwards trajectory and record robust growth figures despite the fragility of the global economy. This has been partially driven by utilizing large amounts of excess liquidity due to the large influx of oil revenues. The monetary base (M0) recorded a substantial 17.2 percent growth by the end of 2012, almost matching 2011's 17.4 percent. The increase was mainly driven by the cyclical increase in deposits with SAMA during the fourth quarter of the fiscal year which has been apparent over the past five years as banks overhaul their balance sheets for annual reporting towards the end of the year. Deposits with SAMA expanded by 24.2 percent to reach a record SR197.8 billion in December. In addition, currency outside banks recorded a growth of 11.0 percent Y/Y to reach SR133.1 billion by the end of the year. Meanwhile, cash in vault reached SR19.7 billion, an annual decrease of 1.3 percent during the same period. Given the direct link between the Saudi and US economies, we expect the current wait and see approach of Saudi Arabian Monetary Agency (SAMA) to continue into the foreseeable future. As long as the inflation rate remains contained, SAMA's versatility in using conventional tools will limit risks from excess liquidity levels, the study noted. The fact that credit activity regained its momentum by recording an average of 14.0 percent annually might prop up the money supply (M3) in the near-term via the multiplier effect. In 2012, M3 expanded by 13.9 percent on an annual basis. The main driver of M3 continues to be represented by demand deposits which gained by 17.6 percent in December. Nonetheless, the level of demand deposits has somewhat stagnated during the mid-2012. Meanwhile, time and saving deposits have held their positive trajectory for the 13th consecutive month as they expanded by 6.2 percent Y/Y to reach SR324.4 billion by the end of 2012. The suppressed interest rates environment pressured time and saving deposits which decreased their share of M3 to 23.3 percent in comparison to 25 percent by the end of 2011. – SG
