Tax Hikes and Covid Can’t Stop Trapped Saudis From Spending
(Bloomberg) -- At Mamo Michelangelo, a French cuisine fine-dining spot in Riyadh, the next available dinner slot is in mid-September.
The restaurant’s reservations phone line that never stops ringing is evidence of the potent fuel propelling a Saudi economic rebound that’s defying gloomy forecasts: billions of dollars in “trapped spending,” money kept at home by some of the world’s tightest travel restrictions during much of the pandemic.
While many countries saw a major domestic spending boost during the health emergency, Saudi Arabia’s an outlier because its above-forecast growth can’t be attributed to stimulus.
The world’s largest oil exporter greeted Covid-19 with one of the most muted assistance packages in the G-20. Instead, it tripled value-added tax to shore up its finances and slimmed down an aid program for the poorest. The austerity approach sparked predictions of a prolonged slowdown.
Yet rising oil prices and an accelerating vaccination campaign have spurred a recovery, catalyzed by Saudis spending their vacations at home. Goldman Sachs Group Inc. lifted its growth forecast for gross domestic product to 4.5% this year, compared to an earlier 2.5%.
Saudis splurged $18 billion on foreign travel in 2019, the last season before the coronavirus emerged, in search of fun unavailable at home and cooler summers.
“We’re creating a destination that makes them feel like they’re out of Saudi Arabia,” said Mareva Sarun, the restaurant’s Parisian guest-relation manager, down to the French lavender in the bathrooms. The city’s well-heeled are clamoring to be seen under its ruby-colored chandeliers and taste its 495 riyal ($132) beef tenderloin with foie gras.
Saudis were banned from almost all international travel from March 2020 until May this year, and the United Arab Emirates, Turkey and Lebanon, all popular spots, are still off limits. Vaccination requirements are another barrier. Any Saudi violating the list of prohibited countries faces a three-year travel ban.
Economists feared for the worst last year, when officials imposed a slew of austerity measures, saying they were the “least damaging” choices available -- necessary to protect state finances as oil revenue plunged. But now analysts are revising forecasts up as the kingdom’s recovery accelerates, aided by higher oil prices, an expanding vaccination program and the penned-in domestic demand.
Wealthier citizens have long spent their leisure money abroad because of limited entertainment options in the conservative Islamic kingdom, something Crown Prince Mohammed bin Salman is trying to change under his economic diversification program.
The pandemic forced that money to find another outlet. After a particularly strict lockdown last year, which included a 24-hour curfew and a near-total ban on citizens leaving the country, many Saudis would rather be anywhere than at home. But restrictions on exiting the kingdom remain, with vaccination required and only about a quarter of the population has had two shots.
“There is a lot of pent-up demand,” said Mazen Al-Sudairi, head of research at Riyadh’s Al Rajhi Capital. Consumer spending was 3.3% higher in the first half compared to the same period in 2019. United Electronics Co., a retail chain, saw its first-quarter profit more than double.
During the week ending July 3, electronic payments at restaurants and cafes reached a record 1.4 billion riyals.
Poorer Saudis are struggling with higher taxes and energy prices and businesses that serve them face a tougher backdrop. Grocery chain Abdullah AlOthaim Markets had a “challenging” first six months as customers spent less than expected, said chief executive Abdulaziz Al-Othaim. He’s still planning an expansion amid hope for a recovery.
But malls, salons and gyms are bustling, and Google mobility data shows workplace visits up 7% versus a pre-pandemic baseline, even as officials report over 1,000 new coronavirus cases daily.
Monica Malik, chief economist for Abu Dhabi Commercial Bank, expects gross domestic product this year to exceed 2019’s levels in nominal terms, which “really shows how quickly Saudi has bounced back,” she said. “We’ll start to see the momentum coming in the second half of the year and building.”
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