Non-oil GDP growth in the UAE and Saudi Arabia should be slightly stronger this year than in 2017 despite the impact of VAT and ensuing inflation, according to PwC.
The professional services giant said in a research note that economies in the Middle East ended 2017 on a high note, with a strong final quarter in 2017, despite some short-term weaknesses surfacing in early 2018.
It said this pattern is in part explained by the rollout of VAT in the UAE and Saudi Arabia.
Richard Boxshall, senior economist at PwC Middle East, said: “Notwithstanding the impact of VAT and inflation, if oil prices remains buoyant, as seems likely, and regional investment flows are boosted by IPOs and a rise in foreign inflows, non-oil GDP growth in 2018 should be slightly stronger than in 2017 which, combined with flat (rather than reduced) oil production, should result in stronger overall growth for the year.”
He said that while foreign direct investment (FDI) is down sharply from its 2008 peak, 2017 data is expected to show signs of recovery and lead to a pick up in both FDI - owing to reforms in foreign ownership rules - as well as broader improvements in the business environment.
“Gulf countries are rethinking the role of foreign investors as they look to ease fiscal burdens and restructure their economies for the twilight of the oil era, with a strong focus on technology-intensive sectors. This is leading to a series of new investment and companies laws and changes to capital market rules," he noted.
He said there is a similarly encouraging story for portfolio investment, which has already benefited from market reforms and if, as expected, MSCI decides to add Saudi Arabia to its benchmark Emerging Markets Index, this could sharply increase inflows into the region as a whole.
PwC said higher oil prices are now boosting confidence in the non-oil economy. Although adjustments such as subsidies cuts and the introduction of VAT this year have had short-term negative impacts, they should make the economy more efficient.
Longer term, PwC said the UAE economy will benefit from a wave of investment in Abu Dhabi’s oil sector and efforts by Dubai to take a lead in many new technologies.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.