VAT, fuel subsidy cuts weigh on Saudi private sector in January

Saudi Arabia’s non-oil private sector saw a subdued start to the year, with softer growth in new orders following the introduction of value-added tax (VAT) in January, Emirates NBD said in its latest Purchasing Managers’ Index (PMI) report.

The seasonally adjusted Saudi Arabia PMI declined to 53.0 in January 2018 from 57.3 in December, as business conditions for the non-oil private sector recorded the slowed improvement since August 2009.

Weaker rates of business activity and new order growth, as well as intense competition for new work, weighed on the headline PMI in January. 

“However, reports from non-oil businesses suggested that the impact on sales was likely to prove transitory, with part of the slowdown simply reflecting a natural payback following strong order flows prior to the policy implementation,” the report said.

Overall input prices across the non-oil private sector economy rose to their highest level since July 2014, due to fuel subsidy cuts and VAT implementation.

Purchasing prices also rose at the fastest pace in 42 months, while staff wages increased to the greatest degree since September 2016, driven by competitive market conditions and subdued client demand.

Nonetheless, business optimism in Saudi Arabia touched an eight-month high in January, the bank said.

“The softness in the January PMI survey was fairly broad-based, with faster employment growth being the main highlight. Wage increases, fuel subsidy cuts and the introduction of VAT is evident in the higher input costs and staff costs components of the survey in January,” said Khatija Haque, Head of MENA Research at Emirates NBD.

Meanwhile, the Kingdom's private sector companies continued to boost their operating capacity in January as the rate of job creation was the fastest for since August 2016.