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.

Nearly 1 million foreign workers, out of a total of roughly 9 million, are estimated to have left Saudi Arabia between last March and November, 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 well 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.

"It's been a massive shock to the local economy," said Rami Sidani, Middle East head of investment at financial firm Schroders, 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.

ECONOMY

The level of oil production, the price of oil and size of government spending remain the biggest factors for the overall Saudi economy, which is still growing solidly; HSBC predicts growth of 4.0 percent this year after an estimated 3.8 percent in 2013. The oil sector is believed to be largely insulated from the labour crackdown, as state-owned giants such as Saudi Aramco continue to obtain the workers they need.

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.

"Some of the contractors are asking for extension on deliveries because of the labour shortage," said Fayyaz Ahmad, assistant director of advisory services for Saudi real estate at consultants Jones Lang Lasalle.

Ahmad 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.

Quantifying the delays and financial costs in the construction industry is difficult, partly because few of the sector's firms are listed on the stock market. But the experience of one major firm, Abdullah A. M. Al-Khodari Sons Co , may be indicative.

The company said on Tuesday that its fourth-quarter net profit tumbled 69 percent from a year earlier to 8.5 million riyals ($2.3 million), partly because of a 28 percent jump in manpower costs.

BANKS

As long as the impact remained limited to the construction sector, investors could shrug it off. Now, however, it has spread to banks, which account for about a third of the Saudi stock market's capitalisation.

Last week Al Rajhi Bank, Saudi Arabia's largest lender by assets and market value, posted a 19 percent slump in fourth-quarter earnings, citing higher costs and missing analysts' forecasts. It cut its dividend for the second half of 2013.

Another major bank, Banque Saudi Fransi, posted a 66 percent decline in fourth-quarter profit, blaming general provisioning for bad loans.

In both cases, analysts believe the banks were preparing for the possibility that construction firms' labour issues could delay loan repayments or make some loans non-performing. The stock market's banking index has risen 4 percent since October, underperforming a 10 percent rise by the main index.

"The construction sector is going through some difficult times and if banks have been lending to them, they will see an impact," said Asim Bukhtiar, head of research at Riyad Capital. "It takes one or two banks to recognise provisions exposure, and others will follow."

Other industries are also exposed to construction. This week major Saudi real estate developer Dar Al Arkan posted a 9 percent increase in fourth-quarter net profit, missing analysts' forecasts by a wide margin.

It blamed lower property sales and a decline in non-operating income. "We don't face direct labour problems, but contractors and suppliers do, and they are the two legs we walk on - their problems are ours," Dar Al Arkan chairman Youssef al-Shelash told Reuters in October.

Some companies are being hit by the foreign workers' exodus not through the construction industry, but because of the effect on consumer spending.

Telecommunications firm Zain Saudi reported on Tuesday a larger-than-expected fourth-quarter loss of 462 million riyals, against a loss of 443 million riyals a year ago.

It blamed the wider loss partly on the crackdown on foreign workers, some of whom had used Zain's mobile phone services. In Kuwait, the share price of Zain Saudi's Kuwaiti parent fell sharply on Wednesday in response.

Analysts expect the Saudi economy to adjust in the long term to less generous supplies of foreign labour.

"Saudi fundamentals remain intact and growth prospects remain - so we're bullish on the Saudi market as a whole, which continues to offer great opportunities, and valuations remain attractive in the long term," Sidani said.

He said the Saudi stock index was trading at about 15.5 times estimated corporate earnings for 2014, compared to Dubai's 17.3 times. – Reuters