Saudi food sector stays defensive ahead of recovery in 2018, says Aljazira Cap

Saudi Arabia’s food and beverage sector continues to be defensive despite short-term economic challenges and cautious spending, Aljazira Capital said in a report Wednesday.

The food and beverage industry is well positioned to mostly absorb the impact of the 5 percent value-added tax (VAT), which will be applied in January 2018, as production taxes would be passed to the end consumers.

In addition, the recent subsidy cuts and VAT implementation are expected to have a mixed impact on consumption habits, with a lower impact on foodstuffs due to VAT-exemption for almost 94 food products.

The inflationary impact on the Kingdom’s consumer price index would be also minimal.

Real household spending and private consumption are expected to grow in Q2 2017, backed by King Salman’s reversal of bonuses and allowances for public sector employees as well as the enhancement of economic conditions.

Due to the recent reversal of salary and bonuses cuts in the Kingdom, combined with “Citizens Account”, the economy is picking up while the current low inflation environment will ensure that purchasing power is not going to be significantly impacted, the brokerage firm added.

Meanwhile, the domestic food industry is forecast to recover in 2018 amid expectations of oil market rebalance, which will raise consumer spending and restore confidence.

Furthermore, favorable demographics, and higher participation of nationals in the private sector through the Saudization program will likely benefit the sector and boost households’ purchasing power.

Aljazira Capital added that the Saudi food industry remains one of the most attractive in the region, with strong sales growth expectation over its forecast period.

“The expansion of the big organized food retailing and producer such as Almarai and Savola will continue to strengthen internal trade systems and local food production, which is expected to contribute to lower cost, that can be passed on to consumers partially offsetting impact of VAT,” the report added.

The food sector will also benefit from a sizeable population of around 31.74 million, at an average household comprising of 6.4 individuals, despite labor market pressures.

Key risks include the Saudi government’s decision to cut its support for the dairy segment, expatriates’ decision to leave the Kingdom following the implementation of expat fees and Saudization plans.

A possible hike in fuel, power and water prices is another downside, along with lower oil prices and high interest expenses following a steady increase in the Saudi Arabian Interbank Offered Rate (SAIBOR), or the rate in the interbank market over the recent past.