Industry Trend Analysis - VAT To Boost Revenue Diversification; Mixed Implementation So Far - MAR 2018

BMI View: The implementation of a planned 5.0% VAT will have the greatest fiscal benefits in Saudi Arabia and the UAE, which have already moved forward with the introduction of the tax. In contrast, political challenges in Kuwait and Oman will likely see the VAT delayed until at least 2019, and while the Bahraini government will likely put the new tariff in place, any significant benefits will be undercut by continued elevated spending.

The introduction of a value-added tax (VAT) at the GCC level will have differing impacts across the region, with challenging political climates limiting some of the benefits of the new tax. In theory, we see the measure as a positive step, allowing the hydrocarbon-dependent economies to further diversify revenues with relatively limited negative economic fallout. Indeed, oil revenues accounted for up to 89.0% of the total in Kuwait in 2016 and given our forecast for an aggregate fiscal deficit equivalent to 5.7% of GDP in 2018 in the GCC, governments will need to find alternative sources of revenues to reduce their budget shortfalls. Meanwhile, the small size of the VAT (5.0%) and the affluent consumer base in the GCC suggests that spending patterns are likely to be impacted to a lesser extent.

That said, while countries like UAE and to a lesser Saudi Arabia are likely to see somewhat greater fiscal benefits, gains in revenue from a new tax measure in Bahrain are likely to be largely offset by elevated spending given the challenging political environment. Similarly, in Kuwait and Oman, political gridlock and concerns about popular discontent have already caused delays to the new tariff and could further delay the tax.

VAT To Support Reduction Of Fiscal Shortfalls
GCC - Aggregate Budget Deficit
e/f = BMI estimate/forecast. Source: National sources, BMI

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