Time: November 10, 2018
Since the implementation of the new labor market reforms, including the imposition of dependent levy almost 21 months ago, about 1.36 million expats’ family members have left the country, according to official statistics. Expats, the hardest hit by these new
economic measures, fall primarily in the lower and middle-income groups. The countries most affected are India, Pakistan, Sri Lanka, the Philippines, Bangladesh and Nepal.
From one side, there are certain benefits from this labor market correction. The most obvious one is enhancing employment opportunities for Saudis. Other benefits include reducing cover-up businesses, enhancing security as a result of crime reduction and redirecting support to citizens by reducing demands for public utilities.
However, the departure of expats and their families has been negatively affecting key private sectors including housing, retail, transport, recreation and education.
The housing sector has been among the most affected owing to the decrease in demand from expatriate residents. The rent for residential units continues to decrease since the downward trend began, when most foreigners who work for low salaries could afford it.
The retail sector saw a loss of consumer spending as a result of the expatriates’ departure. As for those who remain, they usually send their relatives back home remittances instead of spending their salaries in the local market. Statistics indicate that wholesale and retail trade, restaurants and hotels’ GDP have contracted by 0.51 percent year over year in the second quarter of this year.
Transport (mainly purchase of vehicles), recreation and culture (package holidays), furniture and furnishings, and restaurants have been also some of the hardest-hit sectors in the Kingdom.
As for education, the number of students registered this year declined by 30-35 percent compared with last year. In addition to not complying with the fees and the Saudization process, this led to approximately 30 percent of private schools operating in the local market going out of business.
In my opinion, the adverse impact of these reforms on the above-mentioned sectors will be in the short term only. The government will review these reforms through specialized committees to make the necessary adjustments and corrections. Furthermore, the newly announced giga projects, which will offer thousands of employment opportunities, will definitely require and attract a new wave of value-added expatriates with their families who will ultimately strengthen the purchasing power of the economy.
During this economic cycle, I believe that local companies in these affected sectors should proactively consider mergers and acquisitions to benefit from consolidations. I highly recommend that foreign direct investors appoint their financial advisers to explore forthcoming promising investment opportunities in these key sectors in the long run.
Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.