Saudi inflation to moderate in 2019: Fitch Solutions

Inflation is likely to moderate in Saudi Arabia in 2019, as the effects of fuel subsidy cuts and value-added tax (VAT) implementation wear off, noted a report by Fitch Solutions Macro Research (a unit of Fitch Group) on Monday.

The report said the implementation of fuel subsidy cuts and the introduction of five percent VAT in January will continue to put upward pressure on prices in the near term, particularly in the transport and food & beverages segments.

“These segments have seen price growth average a robust 10.4 percent and 6.2 percent year-on-year (YoY) respectively in the January-September period. However, persistent weakness in the housing market - which has struggled to recover from the H2 2014 oil price slump and associated slowdown in economic activity - will serve to mitigate this pressure to a large extent,” it noted.

Housing deflation, which has averaged 0.4 percent in the year-to-date, accelerated to 3.2 percent in September and there is little to suggest a notable market pick-up will be forthcoming over the final months of 2018, Fitch Solutions said.

In 2019 Fitch Solutions expects a more pronounced deceleration in price growth as the base effects of subsidy cuts and VAT fall off.

“This view is also underpinned by our expectation for the Saudi government to shift away from fiscal consolidation next year, which means that any further subsidy cuts or tax hikes are unlikely to prove substantial or to have a major impact on inflation,” it added.

Overall, Fitch Solutions forecasts Saudi inflation to average 2.6 percent YoY in 2018 and 2.2 percent in 2019, up from deflation of 0.9 percent in 2017.