Saudi Arabia, UAE non-oil growth slips in March in post-VAT slump

But the PMI surveys show encouraging growth trends

Saudi Arabia PMI dips in March as VAT dampens demand. Tasneem Alsultan / Bloomberg

The non-oil private sector business sector growth slowed in March in Saudi Arabia and the UAE, the top two Arabian Gulf economies, as a rise in prices following introduction of VAT at the beginning of this year weighed on demand, according to the latest surveys.

Nonetheless, there were some encouraging signs as business activity expansion in the UAE remained above the historical average, while in Saudi Arabia business optimism among purchasing managers was above the 12-month average.

The Emirates NBD UAE Purchasing Managers’ Index (PMI) dropped to 54.8 in March from 55.1 in February. A reading above 50 in the PMI suggests the non-oil economy is growing, while a reading below 50 suggests a contraction. The survey is sponsored by Dubai-based lender Emirates NBD and produced by IHS Market.

The reading was the most muted since May last year and the rate of pace of job creation fell to a 17-month low.

“Although the UAE’s PMI score continues to moderate from the pre-VAT boost enjoyed at the end of 2017, it remains firmly in expansionary territory, and continued discounting by firms should help stimulate demand,” said Daniel Richards, Middle East and North Africa economist at Emirates NBD. “Firms are more positive towards future output than they were last month.”

Businesses in the UAE got a lift after oil prices last year recovered from a three-year slump and consumers increased spending ahead of the 5 per cent VAT levy in January 2018, taking advantage of discounts offered by vendors. That led to a burst in purchasing activity which has since abated, as reflected by a drop in new orders.

Output growth in the UAE softened to a 23-month low, however, confidence in the non-oil private sector has improved since February, the survey noted.

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In Saudi Arabia, the PMI fell to a record low in March due to a drop in new orders and stalled employment, completing the weakest quarter since the survey began in August 2009.

The headline Emirates NBD’s Saudi PMI slipped to 52.8 in March from 53.2 in February. However, despite the overall weakness, business output growth picked up and the pace of input cost inflation abated from a high seen at the beginning of 2016.

“The fall in the pace of expansion in Saudi Arabia’s non-oil private sector to its lowest levels on record last month will prompt firms to continue price discounting in a bid to galvanise demand; output prices were below the neutral 50 level which delineates contraction and expansion for the second month running in March,” Mr Richards said.

Saudi Arabia, the world's biggest oil exporter, is introducing taxes and implementing other reforms to shore up government revenue dented by the oil price slump. The kingdom, like the UAE, introduced excise tax last year and implemented 5 per cent VAT this year as part of these measures.

In terms of new business, the report said anecdotal evidence suggested that the introduction of VAT dampened demand amid competitive pressures. At the same time, foreign demand dipped for the second straight month.