2019 economic outlook: Weaker oil would put pressure on expenditure in countries with higher break-even prices

Early data suggests that the inflationary impact of the value-added tax (VAT) in both Saudi Arabia and the UAE has largely been contained, according to the most recent PwC Middle East Economy Watch.

Richard Boxshall, senior economist at PwC Middle East, writing in the report, said the impact of VAT in Saudi Arabia was “limited”, mainly because it raised more revenue than was initially expected.

“Overall, the new tax policy has been relatively successful in diversifying government revenue without producing excessive inflation,” he said. “A fuller picture will emerge over the next six months or so, including from studying Bahrain, which joined the VAT club this year.”

Saudi Arabia’s preliminary fiscal outturn data, released alongside the budget in December, estimates that VAT raised $12.2bn in 2018 – nearly a third more than it had expected.

In a January 2018 projection made by the General Authority of Zakat & Tax, the amount raised is equivalent to about 1.6% of GDP.

“This suggests a relatively high efficiency of collection in relation to private consumption by international standards,” said Boxshall.

“The VAT brought in more funds than the expat levy and excise taxes combined, and triple the amount from taxes on income and capital gains.”

While no data is available on the UAE as yet, Boxshall said it is likely to be higher in relative terms than in Saudi Arabia “because private consumption makes up a larger share of the economy”. Seventy percent of the revenues will be distributed to each of the seven emirates, potentially providing a substantial boost for some.

Best year for exporters
Boxshall said 2018 was the best in five years for Middle Eastern oil exporters, driven by two main factors – rising oil prices and increased government spending.

“This combination of stronger prices, as well as fiscal and structural reforms put these economies on a solid footing for 2019, despite a weaker final quarter marked by increased geopolitical risks and oil prices falling into correction by year’s end,” he said.

Oil market developments are likely to be the dominant economic driver for the region once again in 2019, following the sharp decline in prices in the final months of 2018, and OPEC and its allies agreeing to cut output by 1.2m barrels a day in November.

Boxshall said weaker oil would put pressure on expenditure in countries with higher break-even prices.

“This includes Saudi Arabia, whose 2019 budget envisages a 20% increase in capex and a 7% overall increase compared with the 2018 outturn,” he said. “However, Saudi Arabia’s low debt level (about 19% of GDP) means it can finance a larger deficit if needed, although it is still aiming to balance its budget by 2023.”

Active year for M&As and IPOs
Whatever happens at a macroeconomic level, 2019 is likely to be an active year for corporate transactions, which includes major M&A and IPO activity.

Banking sector mergers are under discussion in several countries. The region is widely recognised as being overbanked and has begun to consolidate over the past few years. As banks scale up through mergers, this should boost the sector’s capacity to finance projects and businesses, supporting growth.

Meanwhile, efforts to attract investment will continue, including the announcement of which sectors are eligible for 100% onshore foreign ownership under a new UAE law. There should also be progress in privatisation efforts in Saudi Arabia, Oman and Kuwait.