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World's Only Deflation Outpost Gets Stuck in Property Malaise

World's Only Deflation Outpost Gets Stuck in Property Malaise

(Bloomberg) -- Sidelined for now in the global economy, deflation is having a second act in the Gulf.

Saudi Arabia, the only country in the world where the International Monetary Fund expected consumer prices to shrink this year, is almost certain to have company from its neighbors. Qatar has seen annual price declines for nine straight months, and the United Arab Emirates is likely to be in deflation throughout this year.

World's Only Deflation Outpost Gets Stuck in Property Malaise

The deflationary momentum began in Saudi Arabia and the U.A.E. because the introduction of value-added tax in 2018 created a high base for comparison. But what’s kept it going is a prolonged slump in housing costs that’s now putting broader price growth into negative territory.

The price swoon is a reflection of weaker demand that’s hobbled Gulf economies. Constrained by their currency pegs, authorities have instead relied on fiscal stimulus to nudge growth, with Saudi Arabia earmarking billions to support the private sector.

From a property oversupply in Dubai to an exodus of foreigners from Saudi Arabia, the backdrop is showing little improvement across the Gulf. Rental prices remain under pressure despite the implementation of measures such as an easing of fees that businesses pay on expat workers in Saudi Arabia and the granting of long-term U.A.E. visas.

World's Only Deflation Outpost Gets Stuck in Property Malaise

It’s “natural for these steps to take time to have an impact,” Mohamed Bardastani, senior economist at Oxford Economics, said by phone. The consultancy recently changed this year’s inflation forecast for the U.A.E. to minus 1% from 0.9%.

What Our Economists Say...

“Will deflation persist in the Gulf? It’s unlikely to end until the excess capacity in real estate has been cleared. And there’s little sign that the clearing process has started in Saudi Arabia and the U.A.E. where housing costs have continued to decline.”

--Ziad Daoud, Mideast economist

Besides the housing doldrums, however, other factors are increasingly in play. Discounting by companies, a weak jobs market and meager wage gains are all depressing prices. Despite a pickup last year, economic growth has yet to rebound to levels seen before the oil crash in 2014.

World's Only Deflation Outpost Gets Stuck in Property Malaise

Gulf currencies are pegged to the dollar, and central banks in Saudi Arabia, Qatar and the U.A.E. don’t target inflation. So while dollar strength has played significant role in depressing prices, there are few implications for policy.

In Saudi Arabia, “deflationary risks are forecast to persist due to relatively subdued economic activity, pressure on expat labor following labor market reforms, and the introduction of new housing supply in the kingdom,” Bank Audi economists led by Marwan Barakat said in a report.

World's Only Deflation Outpost Gets Stuck in Property Malaise

Deflation has been more shallow in Qatar than among its Gulf neighbors, which have led a campaign since 2017 to keep an embargo on the gas-rich nation. Qatari housing prices have stabilized after several years of declines

“Qatar is less deflationary,” said Rory Fyfe, managing director and chief economist at MENA Advisors in London. “The housing market is on a different cycle. It has now bottomed out.”

World's Only Deflation Outpost Gets Stuck in Property Malaise

In contrast to the past experience of some developed economies such as Japan, deflation in the Gulf is more confined to particular sectors.

Still, the extent of the deflation is a surprise. Prior to this year, the U.A.E. last had annual price declines in 2011. Even if the lower cost of Emirati housing and utilities is excluded, price growth would still be negative, according to Oxford Economics.

World's Only Deflation Outpost Gets Stuck in Property Malaise

“We expect deflation to persist through 2019” in the U.A.E., Bardastani said in a report. “The real estate market is not expected to recover significantly, given continued strong supply growth and sluggish demand as a result of the weak job market.”

To contact the reporter on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Paul Abelsky, Lin Noueihed

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