Mideast faces low inflation risk this year
ACROSS GCC, CPI EXPECTED TO AVERAGE BELOW 3% ACCORDING TO ESTIMATES
Across the GCC, consumer price inflation is expected to average around 3 per cent this year according to estimates by IIF
Inflation risk across the Middle East and North Africa, including GCC countries is expected to remain subdued during this year according to economists. Across the GCC, consumer price inflation (CPI) is expected to average around 3 per cent this year according to estimates by Institute of International Finance (IIF), a Washington headquartered association of 450 banks and financial institutions.
“Inflation is expected to remain subdued, slightly less than 3 per cent, as food and non-fuel commodity prices decline further in 2015,” said Garbis Iradian, Chief Economist, Middle East and Africa of IIF.
Emirates NBD expects consumer price inflation in the majority of non-GCC economies in the Middle East and North Africa to remain relatively well contained. “We see little risk that more pronounced upside price pressures will materialise in the second half of the year,” JeanPaul Pigat, Senior Economist at Emirates NBD said in a report.
As of March, headline CPI in Jordan and Lebanon was firmly in deflation (-1.2 per cent year on year and -3.4 per cent respectively), and below 2 per cent in Morocco and Iraq. The two exceptions to the regional disinflationary trend are Egypt and Iran, where varying degrees of subsidy reforms, supply bottlenecks and exchange rate weakness has kept CPI in double-digits.
The ongoing downtrend in global food prices has been the primary factor pushing headline inflation rates lower in recent months. Food accounts for anywhere between 20-40 per cent of consumer price baskets in the region. With the exceptions of Morocco and Algeria, food price inflation in every non-GCC economy in Mena at the end of the first quarter 1 was several percentage points below its long-term average.
“Looking at the World Food and Agriculture Price Index released by the United Nations, not only are food prices expected to remain low this year, but their pace of decline also appears to be accelerating, which should continue to weigh on headline CPI in the months ahead,” said Pigat.
Strong dollar
Exchange rate movements are also playing a major role in driving inflationary trends at the moment. While the strong dollar is applying brakes on imported inflation in the GCC countries, other regional economies with dollar pegs such as Jordan, Lebanon, Iraq have seen the weakest CPI readings.
“Given our view that further dollar gains are on the cards in the second half of 2015, dollar pegs should also help keep a lid on inflation in the near term. In contrast, those economies that are allowing their currencies to depreciate in a bid to improve their external positions — Morocco, Tunisia, Algeria, Iran — risk seeing a rise in imported prices this year,” said Pigat.
There has been a significant increase in official reserves in many of these countries. Central banks in Jordan, Morocco, Egypt and Tunisia have reduced their key policy rates to stimulate growth. Morocco’s, Tunisia’s and Egypt’s currencies have depreciated against the US dollar by 1015 per cent since oil prices started to fall in mid-2014. Lebanon’s and Jordan’s currencies, which are pegged to the dollar, have appreciated both in nominal and real effective terms.
Energy subsidies
Analysts say the impact of low oil prices on inflation across non-GCC Mena countries is limited. “Heavy government energy subsidies mean that there is limited direct transmission between changes in prices in international markets to those in domestic markets in Mena.” said Pigat.
At macro level the drop in oil prices is seen as helpful for the current and fiscal accounts and provides space for macro policy support. “Low oil prices have provided an opportunity to remove/reduce subsidies on fuel at less political cost. Low pass-through from global oil prices to domestic fuel prices in Egypt, Jordan, Tunisia, and Morocco limits the impact on disposable incomes and input costs of firms,” said Iradian.