Saudi food prices set to rise on higher costs, import duties

Food prices in Saudi Arabia are expected to reverse their downward trend in 2017, and edge up in line with the increase in global food prices, analysts told Argaam.

The price rise will be bolstered by taxes such as those on imported items like frozen poultry, along with higher operating expenses – following the government’s decision to slash certain subsidies.

A sharp increase, however, is unlikely as companies are expected take up competitive pricing to attract customer spending, which has dipped in the wake of reduced subsidies.

“The market is currently very competitive and companies are offering discounts and various promotions to maintain market share. Accordingly, the net impact may actually be less prominent,” Fatema Faisal Al Doseri, senior analyst at investment firm SICO told Argaam.

Prices of foodstuffs fell 3.6 percent year-on-year in January, remaining in the negative territory for the sixth consecutive month, Jadwa Investment said in a note last month.

Food inflation was down 3.4 percent in February.

Jason Tuvey, Middle East economist at Capital Economics, called the recent decline in Saudi food prices “lagged impact” to the previous decline in global food prices.

“Looking ahead, the drop in food inflation should reach a trough soon and rebound over the course of this year. After all, global food prices have edged up in recent months,” Tuvey said.

Meanwhile, reduced subsidies on energy will likely have only a marginal impact on consumer prices, despite significantly affecting the profitability of key players in the market, said Sadia Alvi, research analyst at Euromonitor International.

“So far, the manufacturers are absorbing the impact of cuts themselves, without passing them on to consumer,” she said, adding it is early to forecast if the firms will to do so in the future.

In December 2015, Saudi Arabia slashed subsidies on fuel as the kingdom looked to narrow its budget deficit brought on by sagging global oil prices. The government has since expanded its economic reforms, lifting subsidies for consumables such as dairy products and certain services.

Meanwhile, an increase in food and beverages prices will also help improve the country’s inflation headline inflation figures, which have slipped into negative territory this year.

“Food and beverages account for 21.7 percent of the Saudi Arabia CPI basket. Higher food prices should result in higher inflation,” Doseri said.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com