SAUDI INFLATION FALLS TO 4.2 PERCENT

UNCLAS RIYADH 001167

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/ARP (HARRIS/BERNDT) AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN SA
SUBJECT: SAUDI INFLATION FALLS TO 4.2 PERCENT


1. (U) Saudi Arabian Monetary Agency (SAMA) Governor Mohamed
al-Jasser presented the annual SAMA statistical report to King
Abdullah in a public ceremony on August 30. Following the
presentation, Governor al-Jasser announced that Saudi inflation
dropped to a two-year low of 4.2 percent in July, down from 11.1
percent in July 2008. Al Jasser said he expected inflation to
continue to decline until year-end, which would help improve
financial stability in the Saudi economy.


2. (U) Al-Jasser announced that for the sixth year in a row, 2008
witnessed continued growth in the Saudi economy. Real GDP grew 4.5
percent and the private sector grew by 4.7 percent. Fueled by
record oil prices, the 2008 budget surplus reached 33 percent of GDP
and the balance of payment surplus stood at 28.6 percent. Saudi
Arabia's banking sector continued throughout 2008 to play a
constructive role in financing economic activities, as indicated by
a 17.7 percent rise in monetary supply. Credit facilities granted
to the private sector increased by 27.1 percent. Al-Jasser noted
that private sector GDP has maintained an average annual growth rate
of 5.5 percent over the past five years. The Kingdom's oil exports
rose by 23.2 percent during the same period.


3. (U) On the down side, Governor al-Jasser pointed out that oil
prices fluctuated during the last quarter of 2008 and the first two
quarters of 2009. He noted that the global economy is going through
one of the worst financial crises ever seen. Although Saudi Arabia
was not directly hit as a result of its conservative monetary
policies, the current financial crisis has brought about a global
recession that is reducing the demand for oil. He emphasized the
need to diversify sources of income and reduce Saudi Arabia's
dependence on oil revenues by allowing the private sector to play a
bigger role in the Kingdom's economic future.

COMMENT
--------------


4. (SBU) Combating inflation in the Kingdom has been one of the
Saudi government's highest economic priorities in recent years,
despite relatively low inflation compared to other Gulf economies.
When Saudi inflation reached record levels last year, it still was
barely above 10 percent, but this was enough to catch the attention
of senior Saudi leaders and according to some reports lead to the
sacking of the Minister of Commerce and Industry. The attention of
most of our contacts has focused on rising rents for both residences
and business places; however, rising food prices (although again,
relatively cheap compared to neighboring countries) may have hit the
average Saudi family the hardest.


5. (SBU) Local analysts predict inflation will remain at current
levels in the months to come, thanks mainly to a fall in prices of
construction materials. While inflation at 4 percent is still above
the comfort zone of SAG leaders, it is much closer to the Kingdom's
long-term average, and significantly below last year's crisis
levels. We expect Saudi leaders will continue to monitor local
inflation. They will also pay close attention to discussions about
global stimulus plans at the upcoming G-20 summit in Pittsburgh for
signs about a return to international growth, as well as any plans
to reduce reliance on fossil fuels.

ERDMAN