Saudisation will support economic growth and although the SR2,400 ($640) levy on foreign employees in excess of locals will cause short-term margin pressures, it will result in long-term gains, a report said.

“We believe Saudisation is a necessity and will lead to significant benefits for the Saudi economy over the long-run,” said Iyad Ghulam, equity research analyst at NCB Capital, the GCC’s leading wealth manager and Saudi Arabia’s largest asset manager.

“While we expect the levy on foreign employees in excess of locals to cost the private sector SR15 billion in 2013, leading to some margin pressure, the funds raised will be used by HADAF to subsidise 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.”

The report states that the need for Saudisation is due to the Kingdom’s young and growing population, coupled with low levels of employment in the private sector where only around 11 per cent of the workforce are Saudis compared to over 90 per cent in the public sector.

With over 6.6 million Saudis currently aged under 15 and many expected to enter the labor market in the coming decades, NCB Capital believes that Saudisation of the private sector is a necessity in order to create jobs for the upcoming generations of Saudi nationals.

NCB Capital’s report estimates that the SR2,400/year levy on foreign employees in excess of local employees will cost to the Saudi private sector will be around SR15 billion in 2013.

The levy will lead to the average cost of foreign labour increasing by 21 per cent and will help reduce the difference between the foreign and local wages by 7 per cent. From the companies analysed in the report, the average impact is around 5 per cent of EBIT, although the variance is high. Given the charge was introduced in November 2012, 2013 will be the first full year impacted by this levy.

Industries reliant on low-paid foreign labour and run on low margins will be impacted most by the levy because they usually have low Saudisation rates. Such industries include building and construction which accounts for more than 45 per cent of the total number of workers in the private sector, employing 3.5 million people. Wholesale and retail account for 19 per cent, while manufacturing industries stands at 10 per cent. The three sectors total 5.8 million workers.

“Based on management feedback, we believe many companies plan to pass on a portion of the SR2,400 expense to consumers to limit margin pressures, thus leading to inflation in prices,” said Ghulam.

“However, many have accepted the reality of Saudisation 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.”

“We believe the Saudisation programme has already led to positive results with around 700,000 locals hired since the recent programmes were launched,” added Ghulam. “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 programmes are helping Saudis become more skilled and will therefore enhance economic growth, which in turn will benefit private sector companies. Lower remittances are another key positive for the economy as the money will be circulated domestically, thus supporting demand for local products and services.”

Saudi Arabia’s population growth is one of the highest in the world with the populace increasing from 15.2 million to 28.4 million in the past two decades and expected to increase further to 38.5 million by 2030. The population forecast assumes a growth rate of 2.1 per cent per annum in the population over the coming few years, double the global average of 1.1 per cent. – TradeArabia News Service