Food prices in Saudi Arabia are increasing as Ramadan draws closer, according to the latest NCB report.

This is together with reduced oil revenues, and the thriving international trade and real estate sector, and declining Tadawul index, the Saudi Economic Review said.

Rising food and real estate prices
Food prices have jumped by 4.8 percent as Ramadan approaches. This caused Standard & Poor's/Goldman Sachs Agriculture Index, a benchmark for investment in the agricultural markets, to rise by 11 percent.

Real estate and rental prices went up because of summer holidays. Yet the report stated that prices are expected to ease once the academic year begins.

Mortgage law's impact on housing sector
Passing the latest mortgage law will allow the Saudis to buy their own accommodation much easier. Mortgage lenders will be able to sell the assets on their balance sheets and use their capital more efficiently. Moreover, the law will allow borrowers to convert their assets easily into cash and hence diversify their risk in a better way.

Mortgage law would also allow for more Islamic financing within mortgage lending, which will allow the buyer to retain an asset ownership.

The Real Estate Development Fund's (REDF) increase in loan size will allow the Saudis to buy an accommodation at SR 500,000 or more.

Competitive mortgage rates and lower risk criteria put by lending institutions will most benefit the middle-income segment. The affluent citizens will also have greater freedom to either finance construction or investment in the housing sector.

Loans market
Banks have the ability to expand their loans portfolios given vast inflows of deposits injected by government over the past few years. However, the pace has slowed because of the sudden local stock market surge, which consumed much cash.

Given the large amounts of large projects, banks are constrained by asset/liability mismatch and are unable to expand their balance sheets with long-term assets.

Accessing the local or international capital market to supply the banks with the needed long-term liability in riyals or dollars may lure investors.

Saudi inter-bank borrowing overnight rate (SAIBOR) has been rising since late September 2011 from 0.6 percent to 0.93 percent by the end of June 2012. However, inter-bank liabilities have gained a substantial 78.2 percent, the highest level since November 2009. The increase is attributed to increased lending activity during the period with no expected sharp rise in SAIBOR in the short-term.

A supporting Saudi monetary policy
Saudi's monetary policy has been a supporting factor to the economic growth in the face of a globally adverse environment. However, M0 (cash or assets that could quickly be converted into currency) dropped by 6.5 percent on a monthly basis.
The decrease in M0 is caused by withdrawal of over SR 20 billion in deposits with SAMA and an SR 9.5 billion upsurge in local banks' total foreign assets. It is also caused by increased cash usage in increased lending activity.

This also contributed to the fourth consecutive monthly slowdown in the long-term deposits (M3). Moreover, demand deposits made record gains albeit at a slower pace and represent 54.1 percent share of M3, a record share. The demand deposits level is expected to continue to outpace time and saving deposits until the global economy regains confidence to raise interest rates.

Fluctuating oil prices

Oil prices have been volatile because of the global economic crisis, weaker global economic growth, political stands-off and abundant crude oil inventories.
Easing repayment rules for emergency loans to Spanish and Italian banks caused oil prices to go up. Later, it went down on new data that unemployment reached the highest level on record.

The Kingdom did not react to the recent downswing in oil prices, which reached less than $ 100 per barrel. However, it is expected that Saudi Arabia will reduce the oil output aggressively should the market balances warrant a reduction in production. OPEC's oil exports are also expected to jump in July bringing further pressure on Iran, as this will keep a lid on crude prices.

Thriving international trade

Saudi nonoil exports jumped in Q1 by 11.4 percent to SR 44.1 billion. The biggest contributors are petrochemicals and plastics exports, which recorded a growth of 24.1 percent and 13.1 percent, respectively. The value increase in petrochemical products compared to the 3 percent increase in tonnage is in line with elevated oil prices.

The largest export market by weight remains the UAE and China, which both increased moderately by 12.8 percent and 11.6 percent, successively. However, Qatar was the most country to increase its Saudi imports, which jumped from SR 1.5 billion to SR 2.3 billion.

Livestock and meat imports marked the biggest retreat of 28.6 percent, followed by a contraction of 26.8 percent in sugar, tea and coffee. Imports of motor vehicles increased by 36 percent reaching SR 3.2 billion, as automobile wholesalers continue to stock on new models.

Private sector exports show 16.9 percent increase in Q1 by importing countries. This is facilitated by 944.2 percent increase from Latin America, followed by a 398.4 percent increase in other non-Western European countries.

The Saudi economy is currently facing a myriad of important financial developments, including reduced oil revenues, thriving international trade and real estate sector, and declining Tadawul index, report added.