Saudi PMI: Activity slows on VAT implementation

Khatija Haque - Head of Research & Chief Economist
Published Date: 05 February 2018

The Emirates NBD Saudi Arabia Purchasing Managers’ Index (PMI) declined to 53.0 in January from 57.3 in December, the lowest reading in the survey history. The rate of increase in both output and new orders slowed sharply in December, with many firms citing the introduction of VAT as a key factor. The survey suggested that many firms boosted orders and output in Q4 ahead of VAT implementation, and that the January slowdown is likely to be transitory.

Unsurprisingly given the slower growth in output and new work, purchasing activity also slowed in January as firms likely stocked up on pre-production inventory at the end of last year. The impact of VAT, as well as cuts to fuel subsidies in January, is also evident in higher input cost inflation last month. However, firms appear to have absorbed the higher input costs last month, citing “competitive market conditions” and “subdued client demand”. Selling prices were only marginally higher in January as a result.

Employment increased last month at the sharpest rate since August 2016, with this index rising to 52.2. Some firms reported hiring ahead of new project starts. Staff costs rose at a faster rate as well, with many private sector firms following suit after the government announced wage increases in January.

Despite a softer headline PMI in January, businesses were more optimistic about the prospects for the coming year than they have been since April 2017. In our view, higher oil prices at the start of the year as well as the announcement of an expansionary budget for 2018 likely contributed to a more upbeat outlook in the private sector, despite the introduction of new taxes and cuts to fuel and energy subsidies.

We expect Saudi Arabia’s economy to expand 2.5% in real terms this year, after a modest contraction in 2017.