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Arab taxing to mitigate oil slump effect: expert

Xinhua, March 7, 2016 Adjust font size:

Simon Kitchen, research director at EFG Hermes, said Sunday that the introduction of taxes by Gulf countries will stabilize regional markets and Gulf Co-operation Council (GCC) firms must adapt.

Briefing the media ahead of the two-day annual 12th EFG Hermes conference, the Egyptian investment firm for the Middle East and North Africa (MENA) region, Kitchen said the planned introduction of taxes similar to the value added tax (VAT) by 2018 will lend GCC oil-rich Arab states increased fiscal flexibility to continue investing in infrastructure projects.

"Nobody likes taxes, however, if as a company you are based in the GCC you'd be more assured that additional roads, bridges and infrastructure will be built in the future during ongoing low crude valuation and you may consider it worth the cost," said Kitchen.

The six GCC states of Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates (UAE) and Oman simultaneously decided to introduce on February 22 a five percent VAT for the very first time since the Gulf monarchies achieved independence.

Kitchen added that income and corporate tax may also be introduced, and as some GCC have reduced spending through cutting subsidies then taxing income and corporations will provide an ongoing fiscal income.

Noteworthy is the decision by both Saudi Arabia and the UAE to cut subsidies on petrol.

Kitchen said EFG Hermes does not foresee oil prices significantly recovering "as Iran is now included in the global market, Iraq is producing more oil, and shale oil is currently part of the global supply."

The International Monetary Fund (IMF) expects that the GCC's combined accumulated budget surplus of 600 billion U.S. dollars in the last five years will become a fiscal deficit of 700 billion dollars in the coming five years.

Kitchen also said that some GCC states sell oil below global market prices, "for example, Saudi Arabia sells a barrel for 20 dollars, while oil currently trades at prices ranging between 30 to 40 dollars."

Liquidity is in short supply regionally and while GCC reserves appear as affordable as during the 2009 financial crisis, "stock recovery will take longer this time around. We won't see a sharp recovery similar to the one in 2010," Kitchen anticipates.

He added that GCC firms with strong balance sheets, pricing power and free from subsidies will be the winners, whereas inefficient low-cost producers, firms dependent on government spending, and highly leveraged firms will loose during the ongoing oil price slump."

Corporations must adapt to the new taxes, said Kitchen, for the regional business environment to remain competitive.

The 12th EFG Hermes investors' conference will start on Monday and end on Tuesday. Endit