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Abu Dhabi, UAEWednesday 20 June 2018

Saudi consumer spending to remain flat, spur consolidation among retailers, Rajhi says

Introduction of reforms such as VAT and energy price hikes will hit non-Saudi households

Saudi Arabia PMI dips in March as VAT dampens demand.  Tasneem Alsultan / Bloomberg
Saudi Arabia PMI dips in March as VAT dampens demand. Tasneem Alsultan / Bloomberg

Saudi Arabia’s consumer spending will remain flat up to 2020 as the kingdom implements reforms, including VAT, energy prices hikes and expat levies, which will push retailers to consolidate to gain a bigger market share, according to a new report by Riyadh-based Al Rajhi Capital.

Consumer spending in the kingdom will rise 3.8 per cent between 2017 and 2020 to 977 billion riyals as economic reforms curb spending mostly by non-Saudis, who will not benefit from this year’s salary increases for public sector employees and the Citizen's Account programme targeting low to medium income Saudi households, said the report from Al Rajhi Capital.

About 90 per cent of Saudi households will be protected from the higher cost of living in 2018, thanks to allowances approved for Saudi public sector employees.

“Our calculations suggest that around 70 per cent of Saudi households are shielded from the impact of reforms during 2017-2020, primarily due to the support of the Citizen Account programme,” said the authors of the report. “Further, the bottom 50 per cent of Saudi households (by income level) will have net benefit from the Citizen Account programme i.e. for these households, cash support is higher than the likely increase in household expenditure due to reforms.”

Saudi Arabia, the biggest Arab economy, is undertaking a raft of reforms to narrow its fiscal deficit, diversify its economy and lower its reliance on oil income. The kingdom introduced an excise tax on fizzy drinks, energy drinks and cigarettes last year and VAT in January this year to boost government revenue. Last year, the country started implementing a levy on dependents of expatriates as well.

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All of these new measures will drive consumer sector companies towards consolidation and getting a bigger market share as unorganised retailers feel the pressure, according to the report.

“Market share gains will be the main revenue driver in the absence of industry growth, and margin pressure from reforms will lead to industry consolidation, favouring organised retailers,” said the report. “Companies such as Al Othaim, Panda, Extra and Jarir will be long term beneficiaries of the shift in market share to organised players.”