Saudi Arabia's deflation expected to normalize in 2020: KPMG

Saudi Arabia’s deflation is expected to normalize in 2020 despite the economy experiencing a deflationary period at the beginning of the year, KPMG Al Fozan & Partners said in a new report.

However, the implementation of value-added tax (VAT), introduced in January 2018, put upward pressures on prices, driving inflation to 2.5 percent last year from -0.8 percent in 2017, it added. 

 “Although the introduction of VAT was essential to achieve some of the Vision 2030 goals, such as increasing non-oil revenue, other economic indicators need to be looked at such as GDP growth, especially considering total real GDP slowed by 0.9 percent in 2017,” said Dr. Hussain Abusaaq, Chief Economist and Head of Research, KPMG Al Fozan & Partners. 

“The economy experienced prices deflationary period at the beginning of 2019, where it is expected to remain for the rest of the year, before normalizing in 2020,” he added.

While the timing of the introduction of tax-based reforms and energy reforms might not be favorable due to the prevalence of deflationary situation in 2017, the benefits of such reforms are likely to very good for the Kingdom in the long-run.

 “In the short run, VAT is expected to cause minimal one-off price rise. In the long term, it is not likely to cause a significant or sustainable increase in underlying inflation,” Abusaaq noted.

Meanwhile, small and medium-sized enterprises (SMEs) experienced a moderate impact from VAT due to high compliance costs, and due to concerns regarding VAT neutrality.

“In response, the government introduced the ‘Private Sector Stimulus Plan’ to stimulate growth, remove any potential obstacles and enhance private sector confidence,” he noted.

“As the government gradually moves towards accomplishing its goal of fiscal balance by 2023, increasing capital expenditure, a greater focus on its fiscal policy, Vision 2030 programs and Citizen’s Account Program could help to pull out the Kingdom from the current state of prices deflation and into the usual and healthy levels of inflation,” he stated.