* Almost 1 million workers estimated to have left country
* Construction firms were hit first
* Now banks, even telecommunications firm reporting impact
* Effect on earnings may continue for a couple of quarters
* Economy will adjust, may benefit in the long run
By Nadia Saleem
DUBAI, Jan 22 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
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
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.
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
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
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
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