Why the Gulf's stability may come at expense of private sector

Moody's research says governments will struggle to adequately accommodate the rapidly growing number of job-seekers in the Gulf
Why the Gulf's stability may come at expense of private sector
Saudi Arabia, the biggest Arab economy, has sent strong messages that it’s serious about replacing foreign workers by setting quotas for national employment and levying taxes on expatriate workers.
By Bloomberg
Thu 11 Oct 2018 01:53 PM

The need of Gulf states to maintain social and political stability may come with a cost to the private sector, Moody’s Investor Service has said.

Regional governments won’t be able to adequately accommodate the rapidly growing number of job-seekers in the Gulf, forcing the private sector to absorb much of the burden, Moody’s said in a research report.

Given that the government pays better, integrating citizens with “inflexible wage expectations” will raise labour costs for the private sector, hamper productivity and make it harder to develop the non-oil economy, it said.

A projected rise in the population of Gulf states and a tightening of fiscal positions is forcing governments to revisit their status as employers-of-first-resort, altering a decades-old social contract where the oil-rich nations looked after their citizens in return for loyalty.

Wage bills constitute the biggest spending item for most Gulf states and public finances have been battered since an oil slump started in 2014.

Keen to avoid potential unemployment-linked instability, the nations have imposed strict rules for the private sector to nationalize jobs.

Saudi Arabia, the biggest Arab economy, has sent strong messages that it’s serious about replacing foreign workers by setting quotas for national employment and levying taxes on expatriate workers.

The private sector is already feeling the pinch. In a rare move, the kingdom’s telecoms regulator this week suspended some of Etihad Etisalat’s services due to its alleged failure to hire enough Saudis. Its shares plummeted as much as 4.5 percent.

Aside from raising the cost of employment in the private sector, the rules have affected consumer-driven companies as expatriate workers who were replaced by nationals leave the region. Almarai, the nation’s biggest dairy, said its 14.5 percent decline in third-quarter dairy and juice profits was partly due to the expat “exodus.”

Authorities will nonetheless find it challenging to create sufficient jobs opportunities over the near term, Moody’s said. The challenge is highest for Saudi Arabia, which has to create at least 1.5 million jobs for nationals over the next 20 years, it said.

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