VAT-driven Saudi, UAE PMI declines will be ‘short-lived’: BMI

The decline in the purchasing managers’ indices for Saudi Arabia and the United Arab Emirates is reflective of the short-term impact of the introduction of value-added tax (VAT) but will be "short-lived", BMI Research said in a recent report.

The Kingdom's PMI fell to 53.0 in January 2018 from 57.3 in December 2017, while the UAE PMI declined to 56.8 from 57.7 in the same period, as many businesses placed orders at the end of 2017 which resulted in a "temporary slowdown" in activity in January.

“We expect the slump in business sentiment to prove temporary, as rising oil prices and the move towards more expansionary fiscal policies will support confidence in the quarters ahead,” the report stated.

Despite the initial PMI declines, BMI expects 2018 real GDP growth of 1.6 percent for Saudi Arabia, up from an estimated contraction of 0.5 percent last year. The UAE GDP will, however, increase by 2.8 percent this year compared to 1.8 percent in 2017.

The report, however, warned that business sentiment in Saudi Arabia will be “more vulnerable following the introduction of new taxes (VAT)”.

Meanwhile, BMI said the effects of VAT on business sentiment will gradually wane in the months ahead, given the governments adopt more expansionary fiscal policies. The two countries will get a boost from infrastructure spending needed to meet Saudi Vision 2030 and UAE’s Expo 2020 requirements, it noted.

The research firm revised its Brent price forecast to average $65.0 per barrel in 2018, up from $54.7 per barrel in 2017, adding gains in oil prices will have a positive impact on the non-oil economy.