DFM in action
UAE investors were none too enthused about Saudi Arabia's VAT rate spike. Their peers in the other Gulf states thought the same. Image Credit: Gulf News Archive

Dubai: UAE benchmarks fell on Monday, as investor sentiments dampened in the Gulf after Saudi Arabia pushed ahead with plans to shore up state finances amid a virus-induced sharp decline in oil revenue.

Dubai Financial Market (DFM) index slipped 1.3 per cent to 1,875 points, while Abu Dhabi Securities Exchange (ADX) fell 0.4 per cent to 4,101 points. Selling on the DFM and the ADX spiked momentarily, falling as much as 2.3- and 1.1 per cent, respectively, after the region’s top bourse – Saudi Arabia’s Tadawul – opened down nearly 3 per cent.

The declines came as Saudi Arabia announced a tripling of its value added tax (VAT) as part of austerity measures to support its coronavirus-hit economy. The oil-rich nation has seen a chunk of its income plummet in recent months as the impact of the pandemic forced down global energy prices.

Turning competitive

“Saudi Arabia’s VAT rate will also be three times higher than Bahrain’s and the UAE’s from July, making those destinations marginally more competitive,” noted Khatija Haque, head of MENA research at Emirates NBD. “The big question is whether other GCC states are likely to follow KSA in raising VAT in their domestic markets.”

Meanwhile in Kuwait, the Emir in a televised address warned that the sharp decline in oil prices, investments and other assets will have a negative impact on the country’s economy.

“Kuwait, Oman and Qatar have not yet implemented VAT and the increased pressure on government finances may finally push them to introduce this tax, particularly in Oman and Kuwait,” Haque added. “Bahrain only introduced VAT at the start of 2019 and is unlikely to raise it in the near term in our view.”

Most of the peer benchmarks in the GCC fell in tandem, with indices in Kuwait down 1.6 per cent, Jordan by 1 per cent and Bahrain 0.5 per cent. The exchanges in Qatar and Muscat traded relatively flat.

Fueling concerns was a continued rise in new coronavirus cases in the region. Saudi Arabia, the UAE and Kuwait reported their biggest daily increases in coronavirus cases on Sunday. New infections remained above thousand for the third-day running in Qatar and Kuwait imposed a 20-day curfew starting Sunday.

Saudi bonds gets an uptick

The brief aversion to risk seen among investors saw the kingdom’s sovereign dollar bonds rise, with the security due 2060 leading the advance. While analysts largely viewed the kingdom’s moves to cut non-essential spending as a long-term positive for bonds, they also saw a shift in sentiment as a result, with investors coming under increasing selling pressured in the coming days.

Nevertheless, such austerity measures was largely viewed crucial at this point and much needed.

“The higher VAT rate is unlikely to boost non-oil revenues this year as consumption has been hit by restrictions on business activity and movement ,” Haque said. “Further cuts to capital spending by the government will weigh on non-oil sector activity this year and probably next year as well, as government spending remains a key driver of non-oil activity despite efforts to diversify the economy.”

Meanwhile, the Dubai PMI (purchasing managers index) fell to a new low of 41.7 in March, the second consecutive reading below the 50-level that separates expansion from contraction.