Friday, 21 December 2007

A Perfect (Sand) Storm of inflation

On the recent course I was discussing inflation with my Saudi delegates. Saudi inflation is estimated at 10% per year, but feels higher – as it often does to people who are reporting their personal experience rather than the average basket supplied by surveys. We talked about the reasons for this, which add up to a difficult time for Saudi buyers;
- wage inflation – Gulf states awarded a 70% pay rise to public sector staff, to compensate for price inflation, which had an immediate effect in increased prices
- overall inflation – general as well as industrial
- Currency link to the dollar – which has fallen 40% against Euro in the past few years, and with much of the Saudi economy strongly linked to the dollar through oil and petrochemicals then European imports have become more expensive
- High oil price – dominates the Saudi economy, but increases raw material costs for petrochemicals, transport etc. (even if fuel is cheap by UK standards)
- Strong demand – Dubai is often said to have 25% of world cranes reflecting the recent burst of investment in the region. This is being matched by other countries including Saudi Arabia where the planned new King Abdullah university and city will be major projects on a scale difficult to imagine in England. Maybe comparible to the reconstruction of East London which is being undertaken for the 2012 Olympic Games.
- Strong investment – SA and all gulf countries are investing dramatically
- Over heating stock market – high values in the market have produced paper profits, and in order to keep this high value companies have to maintain growth – which means investing
- Dash to invest while oil prices high – the lessons of the 1970s are recognised by the Gulf governments, who intend to utilise this windfall for lasting benefit to the region
- Perception as a rich region – compared to India and China, where there is equally strong growth, the gulf is a region with deep pockets and a willingness to pay
- Lastly, a perception that they will pay. Saudi companies are used to inflation and to prices going up not down. I did a course a few years ago for a chemical company who’s young sales team had never put up prices, and where uncertain how to do so. I bet they have experience now in putting up prices. In SA, there is no experience or culture of driving prices down, and so inflation grows unchecked.

None of this is a problem for Saudi Arabia at the moment, but hopefully the time will come when the value of improved purchasing and price control will be recognised. At the moment the concerns of my delegates remain mainly sourcing sufficient materials, rather than cost control.

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