The Ramadan effect

The month of Ramadan is a period of unusual and frenetic activity for Gulf economies. Published in The Gulf, August 2011

Signalled by the first sighting of the crescent moon, the Islamic holy month of Ramadan will unite 1.2 billion believers in fasting and spiritual reflection.

Across the Gulf, offices shut early, afternoon phone calls go unanswered, tourists stay at home and major deals are put on hold. But despite the impression that is created each Ramadan of lower economic activity, the reality is rather more complex. The four weeks ending in the Eid al Fitr celebrations are a time of unusual economic activity.

While many aspects of business life do indeed slow down, some areas, such as spending on food and other consumables experience a marked increase in activity. In essence, rather than simply slowing down, the character of the economies changes, with a rise in consumer spending helping to make up for the fall in other areas.

"Some sectors tend to get more active during Ramadan," says Esam Fakhro, chairman of the Bahrain Chamber of Commerce and Industry. "Though some sectors experience a slowdown you will find that, because of the social habits during the month of Ramadan, spending on food is in fact more than in the normal months.

"Although during the daytime things can get a little slow, in the evenings, particularly in the malls, you will find there is a lot of activity. This usually makes up for the slowdown in the daytime."

This rise in consumer spending can create its own problems, however, in particular leading to an increase in inflationary pressures. This happens both during Ramadan itself and in the months leading up to it, as households build up their stocks of food and other supplies.

Gulf governments have tended to respond with a mix of formal price caps and informal pressure on retailers to dissuade them from raising prices too much. Governments trumpet everything from roving ‘price squads’ of inspectors to jail terms for retailers who inflate the cost of basic goods. This year, the high price of commodities on international markets only adds to the need to impose some restraint.

"There is a need for the GCC countries to put these restrictions in place because right now food prices are the main driver of inflation, particularly in countries like the United Arab Emirates and Qatar where the overall inflation environment is subdued because of what is happening in the property sector," says Mohamed Rahmy, an economist at Egyptian investment bank Beltone Financial who specialises in the Gulf Co-operation Council (GCC) markets. "But in Kuwait, Saudi and Oman also, food prices are important drivers of inflation."

In addition, the wave of political uprisings around the wider region this year mean that Gulf governments are more aware than ever of the potential for discord that high food prices present.

In its response, the UAE Ministry of Economy launched a nationwide campaign at the end of May to fix the prices of 400 commodities at 70 retail outlets around the country, including at major supermarket chains such as Spinneys and Carrefour. Such moves have however generated some backlash from major consumer brands. Unilver criticised the UAE’s food price controls, calling them "unsustainable" in a free market economy.

"When the fuel oil prices go up...distribution costs go up, the wages go up and food commodity cost pressure is also coming up," said Sanjiv Mehta, Unilever’s chairman for North Africa and the Middle East.

On 21 June, the consumer protection department of Qatar’s Ministry of Business & Trade followed suit, announcing that it had set reduced prices for 267 food and non-food items – a significantly higher number than last year.

The UAE government says it will use teams of inspectors to make daily visits to retail outlets to ensure that they are abiding by the price fixing measures. Bahrain, which does not set specific price caps, also keeps a close eye on prices through the Ministry of Industry and Commerce. Its National Price Control Committee held its most recent meeting on 15 June, when it discussed the issue of likely consumer demand during Ramadan, among other things.

Such measures are generally seen as effective by economists, helping to keep inflation in check, although governments are also helped by the fact that the overall inflation environment in the GCC has eased considerably from the peaks of a few years ago.

"Usually governments put pressure [on retailers] to make sure food prices stay more or less steady," says Marios Maratheftis, regional head of research at Standard Chartered bank. "They tend to be effective in most Gulf countries. In the Gulf, price controls have already kicked in and they are having an effect in reducing the impact of high international food prices on the population."

Gulf governments are also helped by the fact that, in most cases, the economies are fairly small and so relatively easy to manage. The same is not always true elsewhere in the region.

"You see discrepancies between countries, but in general it is a time of the year when food prices go up," says Beltone Financial’s Rahmy. "In markets that are less efficiently regulated, like Egypt for instance, you see that retailers sometimes increase prices by more than international prices, or domestic supply and demand forces dictate simply to capitalise on the increase in consumption levels, in addition to the normal increases that are in tandem with international prices. The GCC countries are much smaller in terms of population and retail outlets, which makes it easier to control the market there than in Egypt. Even if some retailers manage to manipulate prices the impact on inflation with the restrictions in place would be muted."

To make the most of the shift in consumer shopping habits, retailers generally close their shops during the afternoon but open them for longer in the evenings. Government offices and businesses in other sectors of the economy tend to simply shut earlier, but the international nature of some markets means that this is not always possible.

"We work in global markets so my routine doesn’t change," says Maratheftis, who is based in the Dubai International Financial Centre. "But there is some more flexibility for people who fast."

Stock markets are emblematic of the type of activity which does not stop, but even here researchers have found some notable trends that come to the fore during Ramadan.

The most comprehensive recent study was published in 2009 by Jedrzej Bialkowski of the University of Canterbury, Ahmad Etebari of the University of New Hampshire, and Tomasz Piotr Wisniewski of the University of Leicester. They found that there was less market volatility during Ramadan than in the rest of the year, while liquidity levels remained steady and returns were, in most cases, higher.

Their research paper, Piety and Profits: Stock Market Anomaly During the Muslim Holy Month, examined stock market activity in 14 predominantly Muslim countries from 1989 to 2007, including the six GCC states. It found that 11 out of 14 countries had higher average returns during Ramadan – with an average return of 38.1 per cent during the month, compared to just 4.3 per cent through the rest of the year.

Saudi Arabia and Bahrain were among the three countries, alongside Indonesia, where returns were not higher but, with the exception of Turkey, all the countries experienced a drop in index volatility during Ramadan.

The report suggested that the religious nature of Ramadan may have led investors to change their behaviour.

"We believe that the Ramadan effect documented in this paper can best be explained by a change in investor psychology," the report’s authors concluded.

"Besides fasting and prayers, Ramadan promotes heightened social awareness. As a fundamental shared experience, Ramadan brings about a sense of solidarity among Muslims, enhances their satisfaction with life and encourages optimistic beliefs. This optimism affects investor sentiment and decisions leading to the price run-ups we report in this paper."

The report’s findings back up previous research on the Saudi stock market from Fazal Seyyed, Abraham Abraham and Mohsen al Hajji of the King Fahd University of Petroleum and Minerals in Saudi Arabia. Their 2005 paper, Seasonality in stock returns and volatility: the Ramadan effect, found a decline in both trading activity and volatility during Ramadan.

Saudi Arabian investment bank Jadwa Investment last month highlighted the distinctive patterns of stock market performance of the Saudi TASI. The investment bank notes a decline over the week before Ramadan "caused by a combination of investors selling shares to raise money to cover high spending during the month, and other investors realising gains in anticipation of a fall in share prices during Ramadan."

The bank points to a further fall over the first three weeks of Ramadan, and a revival in the final week, followed by a consistent pick-up in the weeks following Eid al Fitr. Sectors which performed strongly during Ramadan over the past ten years were banks and telecoms: Ramadan is a time of peak spending and therefore borrowing, while Saudi telecoms firms generate roaming revenues from the influx of foreign pilgrims. Food and agriculture companies also tend to outperform. On the other hand, the underperformance of Saudi cement firms reflects the shorter working day, and lower productivity of fasting labourers.

Such research is made possible by the extensive daily data available from stock markets around the region. However, the same cannot be said of the data available for gross domestic production (GDP), which is only published on a quarterly basis by Gulf governments.

This paucity of official statistics means that the total impact of Ramadan on the economy is difficult to quantify. Business activity may decrease in many areas, but it is unclear whether the higher levels of consumer spending during the month are enough to fully compensate for this.

"We don’t have monthly data so we cannot really assess it," says Maratheftis. "I would guess that during Eid consumption picks up and that increases GDP, but without monthly data it is impossible to calculate that."

The full scale of the economic impact becomes all the harder to gauge when Ramadan falls during the summer months, as it does this year – a time when business traditionally slows down in the Gulf anyway.

"In real terms, if there were figures you would see a slowdown of economic activity during the summer months, but there would definitely be an added impetus from private consumption, especially in countries where private consumption plays a big role," says Rahmy. "In the UAE for instance, you would see an increment in growth of private consumption that could compensate for a deceleration in investment growth during the period."

But while the scale of change may be difficult to measure, there appears to be little doubt that the impact of Ramadan is at least consistent and so is something that businesses can plan for.

"It is something cyclical. It is not something that you can avoid," says Fakhro.