MIDEAST WEEKAHEAD-Saudi rule on foreign staff to hit construction sector

DUBAI Wed Dec 12, 2012 11:42am EST

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DUBAI Dec 12 (Reuters) - Saudi Arabia's efforts to reduce unemployment by imposing fines on companies that hire more foreign workers than Saudi nationals will hit construction firms particularly hard.

As part of the government's 'Saudization' plan, the labour ministry announced last month that companies that employ more expatriate workers than Saudis will be fined a fee of 2,400 riyals ($640) a year for each excess foreigner.

The policy came into effect at the start of the new Islamic year on Nov. 15 and the Minister of Labor said more than 40 percent of private sector companies might be shut down if they fail to meet their Saudization targets, according to local media reports.

Analysts say the construction and real estate sectors are most likely to suffer from the extra cost as they operate on tight margins and have the highest ratio of foreigners to local employees. That is mainly because they employ many unskilled workers and foreign labourers, mostly from south or southeast Asia, generally demand lower wages than Saudis.

"If you're adding 2,400 riyals a month, you're increasing the salary bill by about 20 percent. For companies that are on tight margins, like in the construction sector, it will probably push contracts (down) to marginal profits if not a loss," said Alhassan Goussous, chief executive officer at Bakheet Investment Group.

"Companies like Jabal Omar and Makkah Construction will see a significant impact."

Analysts are also concerned about a lack of resources to replace foreign workers with Saudis.

"There is a comfort zone among local companies on profits -they've been hiring cheap labour for decades and now they have to jump out of this comfort zone," said Abdullah Alawi, assistant general manager and head of research at Aljazira Capital.

"Saudization will be a challenge in the construction sector in terms of replacement since Saudis would not be attracted to blue collar jobs."

But while larger firms should be better placed to handle the new regulation - many already have close to an equal Saudi-to-foreign employee ratio - banks could feel an impact if some of their corporate customers are hit by the higher labour costs.

"The construction sector will be hit hard. Their business competitiveness would be affected and consequently, it will affect banks as well," said an analyst at a Saudi bank who asked not to be identified. "Lending may not be as strong if corporate clients are not as strong."

Members of the Shoura Council, which drafts and proposes legislation to the Saudi king, have criticised the new regulation as bad for business and some corporate executives are pushing for it to be repealed.

"The question is will it actually stick? - a lot of people are complaining and there is a chance the ministry of labour will put it to the Shoura and it will be delayed," said Bakheet's Goussous.

CONSUMPTION BOOST?

Some analysts said companies in the consumer sector could eventually benefit if more Saudis are in jobs as they would probably spend more in the country than foreign workers.

That benefit will only be seen over the medium term but would benefit consumer companies such as retailer Fawaz Abdulaziz Alhokair Co. Companies in the sector should not be too badly affected by higher labour costs as they tend to employ mostly Saudis already.

Expatriates account for 8 million of Saudi Arabia's population of more than 27 million.

Youth unemployment was one of the main drivers of last year's unrest in much of the Arab world, although it did not seriously affect Saudi Arabia, where King Abdullah announced a $110 billion package of benefits to defuse any potential discontent.

His decree included increased welfare benefits and a promise to create more jobs.

In January, Labour Minister Adel Fakeih said the Middle East's largest economy needed to create 3 million jobs for Saudi nationals by 2015 and 6 million by 2030, partly through "Saudi-izing" work now done by foreigners.

"This has to be looked at from an economic perspective. It will increase national wealth and fix the local unemployment issue," said Aljazira Capital's Alawi. "You will also have more income generated in the economy and that will increase local demand for goods and services and help drive more jobs as a multiplier effect." (Reporting by Nadia Saleem)

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