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Saudi Arabia – Foreign worker exodus impacting the economy

23 January 2014

The impact of Saudi Arabia's crackdown on illegal foreign workers is spreading through its economy, moving beyond the labour-intensive construction industry to sectors as far afield as banking and telecommunications, reports Reuters.

Nearly one million foreign workers, out of an estimated nine million, are estimated to have left Saudi Arabia between March and November 2013, as authorities enforce work permit rules and corporate quotas for employment of local citizens.

It is the most far-reaching shake-up of the Saudi labour market in many years. In the long term, it may be good for the economy, cutting the number of marginally productive jobs, reducing the jobless rate among Saudis, and limiting the amount of money which flows out of the country in the form of foreign workers' remittances.

However, fourth-quarter earnings announcements by listed Saudi firms since last week suggest the crackdown is now having a broad and serious impact on corporate profits, as companies struggle with labour shortages and have to pay higher wages to hire local citizens.

While the Saudi stock market is still near five-year highs, it is up only +2.2 percent so far this year, the weakest major Gulf Arab market. The labour issue is one reason.

Rami Sidani, Middle East head of investment at financial firm Schroders, commented: "It's been a massive shock to the local economy," referring to the exodus of foreign workers.

He predicted some companies' earnings would remain under pressure for the next two quarters as domestic consumption was hit, though equilibrium would eventually return and the labour crackdown was essentially a short-term issue.

The private sector still looks healthy in many ways - December's SABB HSBC Saudi Arabia purchasing managers' survey, which excludes oil, showed output rising at its fastest pace since April. This seems to support the contention of Saudi authorities that many of the foreign workers who have left were employed unproductively in the informal sector, and were not vital to the growth of the economy.

Nevertheless, the disruption felt by some individual companies is clearly considerable. The construction industry began reporting an impact early last year; it is the most exposed because Saudi citizens tend to shy away from taking strenuous blue-collar jobs.

Fayyaz Ahmad, Assistant Director of advisory services for Saudi real estate at consultants Jones Lang Lasalle, said the construction industry's labour shortage had eased somewhat since November as companies scrambled to obtain legal foreign workers by obtaining more visas, but this solution was expensive, and the problem could drag on until July.

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