Saudi Arabia's inflation rate for 2022 has been revised upwards to 2.4 per cent, from 1.7 per cent previously, driven by a global rise in food prices triggered by the Russia-Ukraine war, Jadwa Investments said.
The kingdom, which imported about 45 per cent of its wheat from Russia and Ukraine last year, recorded a 40 per cent rise in the cost of buying wheat so far in 2022, the investment bank said in a new report. Food and beverage prices in the kingdom rose an average 2.4 per cent annually in February compared with a 2 per cent rise in January.
"Looking ahead, we expect further rises in global food prices, as a result of the Russian-Ukrainian conflict, to put upward pressure on food prices locally," Jadwa said.
"Higher consumption of food and beverages traditionally observed during the holy month of Ramadan is likely to add to food-related price pressure locally, albeit temporarily."
Russia and Ukraine are major players in the agricultural commodity markets, accounting for 53 per cent of the global trade of sunflower oil and seeds trade, and 27 per cent of wheat trade, according to a report by the United Nations Conference on Trade and Development.
Its Food Price Index, which tracks the international prices of items such as vegetable oils and dairy products, reached an all-time high of 140.7 points in February, up nearly 4 per cent from January, and rising 24 per cent on an annual basis.
As Ukraine's ports remain closed and much of Russia's grain supply is barred by western sanctions, there are rising concerns that tightening supplies will lead to shortages in importing countries.
The upward revision of Saudi Arabia's inflation forecast also comes amid other global and regional developments.
Covid-19 lockdowns in China are starting to pressure already strained global supply chains, leading to higher imports costs from key trading partners such as Saudi Arabia, Jadwa said.
About 20 per cent of the kingdom’s imports are shipped from China. Nearly half of the Asian country's exports are produced in areas that currently have Covid-19 lockdowns, the bank said.
"Due to the current round of lockdowns and a continued implementation of a zero-tolerance of Covid-19 cases in China, we now see this as an upside risk to local prices," Jadwa said.
However, with the US Federal Reserve raising interest rates by 25 basis points recently and indicating an aggressive path to further rate increases during the remainder of the year, Jadwa expects the value of the dollar (and therefore the Saudi riyal) to rise, "which should help insulate the kingdom’s import costs somewhat during the year", it said.
Meanwhile, a rise in housing demand in Saudi Arabia, because of an increase in the number of expat workers, is also adding to inflationary woes.
"Looking ahead, with robust levels of non-oil activities growth anticipated in 2022 (at 3.4 per cent according to our forecasts), we expect further rises in the number of expat workers, which, in turn, could see the ‘rentals for housing’ segment recording its first yearly rise since 2016," the bank said.
Consumer spending grew 10.4 per cent year-on-year in February, compared with an average annual rise of almost 5 per cent in the fourth quarter of 2021, the data showed.
"With consumer sentiment climbing to its highest level on record in March, and with a vast majority of Covid-19 restrictions being lifted during the same month, we expect consumer spending to show strong levels of growth, especially so with respect to services such as hotels, restaurants, coffee shops and transport," the bank said.
Saudi Arabia's economic growth is expected to more than double in 2022, helped by higher oil prices and a “robust” non-oil sector, while unemployment among citizens is on the decline, Jadwa said in an earlier report.
The Arab world's biggest economy is forecast to grow 7.7 per cent in 2022, from 3.2 per cent last year.