Saudi PMI Falls to Record Low

A measure of business activity in Saudi Arabia’s non-oil economy dropped sharply to a record low in January, as the implementation of a new value-added tax hit output and purchasing.

The Emirates NBD Purchasing Managers’ Index fell from 57.3 in December to 53, the lowest reading in the survey’s history, as production and new orders slowed. Companies had boosted output and purchasing at the end of last year, ahead of the new tax, meaning the slowdown “is likely to be transitory,” Khatija Haque, head of Middle East and North Africa research at Emirates NBD, wrote in the report. A reading above 50 indicates that the economy is still expanding, Bloomberg reported.

Haque, head of MENA research, 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. However, firms were the most optimistic about their prospects in the coming 12 months than they have been since May 2017.”

Saudi Arabia is entering a crucial year for Crown Prince Mohammed bin Salman’s plan to remake the oil-dependent economy as officials try to raise government revenue without snuffing out economic growth. It introduced the 5% value-added tax on Jan. 1 alongside higher fees for foreign workers and subsidy cuts that drove up fuel and electricity prices.

Even with the changes, businesses are more optimistic about their prospects than they have been since April 2017 due to higher oil prices and the government’s announcement of an expansionary budget this year, Haque said. Employment increased last month at the fastest rate since August 2016, with firms reporting hiring ahead of new projects.

The seasonally adjusted PMI is compiled from monthly replies to questionnaires sent to firms in manufacturing, services, construction and other non-oil sectors.

The United Arab Emirates, which also introduced VAT at a rate of 5% in January, also witnessed a slowdown in the growth of its non-oil economy, but it was less pronounced—the UAE PMI Index dropped to 56.8%, down from 57.7% in December, Reuters said.

UAE purchase costs rose at their fastest rate since November 2011, the data showed, but purchasing activity slowed, suggesting that firms had been building up stocks in advance of the introduction of VAT. 

The survey also showed a significant improvement in business confidence, with panelists forecasting that activity increases once the VAT system becomes more familiar.

Meanwhile, Egypt’s non-oil economy remained in a state of contraction, but only just—the Egypt PMI rose to 49.9 in January—up from 48.3 in December.