VAT-induced economic lull "short-lived", says BMI

The UAE's and Saudi Arabia's PMI indices fell for the month of January as businesses placed orders in advance of VAT implementation

Researchers will examine the spending habits of thousands of families throughout 2019. Mona Al Marzooqi / The National

Declines in the purchasing managers indices for Saudi Arabia and the UAE are likely to be "short-lived" and reflective of the short-term impact of the introduction of value-added tax in both economies, according to BMI Research.

"We expect the slump in business sentiment to prove temporary, as rising oil prices and the move towards more expansionary fiscal policies will support confidence in the quarters ahead," said the note.

Emirates NBD’s UAE Purchasing Managers' Index fell to 56.8 in January form 57.7 in December, the lender said last week. The seasonally-adjusted Saudi Arabia PMI also declined to 53 in January from 57.3 in December, as business conditions for the non-oil private sector recorded the slowest improvement since August 2009 when the index was first published. A reading above 50 suggests the non-oil economy is growing, while a reading below 50 suggests a contraction.

Orders placed by businesses in anticipation of VAT triggered a temporary slowdown in activity, noted the report.

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BMI, a Fitch subsidiary forecast real GDP for Saudi Arabia and the UAE to grow 1.6 per cent and 2.8 per cent respectively, up from what it expects was a contraction in both economies at the rate of 0.5 per cent in the former and 1.8 per cent in the latter.

It cautioned, however that growth projections for Saudi Arabia remained weaker as business sentiment in the country was viewed as more "vulnerable" following the introduction of VAT.

Expansionary budgets in both countries, as well as infrastructure plans to meet UAE's Expo requirements as well as Saudi Arabia's Vision 2030 is set to revive flagging economic activity at the start of the year.