Saudi Business Gauge Falls to Record Low as Economy Hit by VAT

A measure of business activity in Saudi Arabia’s non-oil economy dropped sharply to a record low in January, as the implementation of a new value-added tax hit output and purchasing.

The Emirates NBD Purchasing Managers’ Index fell from 57.3 in December to 53, the lowest reading in the survey’s history, as production and new orders slowed. Companies had boosted output and purchasing at the end of last year, ahead of the new tax, meaning the slowdown “is likely to be transitory,” Khatija Haque, head of Middle East and North Africa research at Emirates NBD, wrote in the report. A reading above 50 indicates that the economy is still expanding.

Saudi Arabia is entering a crucial year for Crown Prince Mohammed bin Salman’s plan to remake the oil-dependent economy as officials try to raise government revenue without snuffing out economic growth. It introduced the 5 percent value-added tax on Jan. 1 alongside higher fees for foreign workers and subsidy cuts that drove up fuel and electricity prices.

Even with the changes, businesses are more optimistic about their prospects than they have been since April 2017 due to higher oil prices and the government’s announcement of an expansionary budget this year, Haque said. Employment increased last month at the fastest rate since August 2016, with firms reporting hiring ahead of new projects.

The seasonally adjusted PMI is compiled from monthly replies to questionnaires sent to firms in manufacturing, services, construction and other non-oil sectors.

Read full article by Vivian Nereim on Bloomberg, February 5, 2018.