MANAMA: Saudi inflation edged up to 6.2 per cent year-on-year (YoY) in August from 6.1pc YoY in July, as the effects of the tripling in value-added tax (VAT) to 15pc from July 1, continued to reverberate on consumer prices.
The latest weekly analysis by Mitsubishi UFJ Financial Group (MUGF) shows that the rise in inflation was primarily driven by a rise in the communications sub-component (9.6pc YoY in August from 2.2pc YoY in July) due to an increase in the price of telephone services.
The Japanese bank holding and financial services company expects Saudi inflation to hover between 4pc and 6pc for the next year as the effects of the VAT hike continue to dominate consumer prices.
“In conjunction with the suspension of the recent cost of living allowance – a monthly payment of SAR1,000 ($267) introduced by King Salman in 2018 in the aftermath of hiking domestic gas prices and the initial VAT introduction of 5pc – this will act as a headwind on households’ real disposable incomes which will weaken private consumption growth in the months ahead,” said MUFG Mena research and strategy head Ehsan Khoman.
“In addition, with the economy facing challenges stemming from the oil-virus shocks, and labour market policies weighing on the expatriate workforce, price pressures are likely to remain subdued in the next year.”
Looking ahead, the Saudi economy is facing headwinds from the twin nature of the oil and virus shocks.
Near-term prospects are weak – MUFG has forecast Saudi real GDP to contract by 4.8pc in 2020 – as the government balances the impact of virus-related austerity measures and the need to support the economy through fiscal and monetary stimulus on the hand, weighed against the need to limit impairment on the sovereign balance sheet from lower oil revenues due to weaker oil prices and reduced oil production in line with the OPEC+ agreement to significantly curb output.
Facing a fiscal deficit which MUFG expects will reach 15.2pc of GDP this year, the government has been forced into fiscal austerity since the outbreak of the pandemic, tripling VAT, raising import tariffs, and reducing public spending despite the underlying economic weakness.
“Twin deficits and weak growth will hamper creditworthiness in the near term, with the timing and magnitude of the recovery conditional not just on virus-related developments, but on the evolution of oil markets in the medium term.” said Mr Khoman.