Saudisation will cost the kingdom’s private sector SR15bn ($3.9bn) in 2013, according to a new report published on Wednesday.
The Arab world’s largest country by population and wealth has issued quotas for private companies to hire nationals in a bid to reduce unemployment among locals amid a booming population, particularly among youth.
Only about 11 percent of workers in the private sector are nationals, compared to more than 90 percent of the public sector.
Since November last year, each foreign employee above the number of nationals has attracted a levy of SR2,400.
The levy would cost employers SR15bn this year, causing short-term pressure on margins, according to Saudi investment company NCB Capital.
“We believe Saudisation is a necessity and will lead to significant benefits for the Saudi economy over the long-run,” NCB Capital equity research analyst Iyad Ghulam said.
“While we expect the SR2,400 levy on foreign employees in excess of locals to cost the private sector SR15bn in 2013, leading to some margin pressure, the funds raised will be used by [the Human Resources Development Fund] to subsidize the hiring of locals.
“Furthermore, Saudisation will lead to lower remittances as the money will be circulated domestically, thus supporting demand for local products and services.”
NCB Capital estimates the levy will push up the average cost of foreign labour by 21 percent and help reduce the gap between foreign and local wages by 7 percent.
The building and construction sector would be the hardest hit because it accounted for about 45 percent of the total private sector workforce, with 3.5m employees.
Other industries reliant on low-paid foreign labour and operating with low margins also would be impacted, including the wholesale and retail sector and manufacturing.
The average impact of companies studied in the report was 5 percent of earnings before interest and tax (EBIT).
But NCB Capital expects many businesses to pass on the levy to consumers to limit the impact on profits, which could cause inflation.
“However, many have accepted the reality of Saudization and are aggressively hiring locals. HADAF, the development fund which receives these levies, will channel the funds back to the private sector to subsidize the salaries of new Saudi hires,” Ghulam said.
“We believe the Saudisation program has already led to positive results with around 700,000 locals hired since the recent programs were launched.
“The major benefits of Saudisation will come through in the long-run despite the short-run margin pressures due to wage inflation for the private sector.
“Saudisation programs are helping Saudis become more skilled and will, therefore, enhance economic growth, which in turn will benefit private sector companies.”