RIYADH — Saudization will support economic growth although the SR2,400 levy will cause short-term margin pressures, according to the latest research report of NCB Capital. “We believe Saudization 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. “While we expect the SR2,400 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 subsidize the hiring of locals. Furthermore, Saudization will lead to lower remittances as the money will be circulated domestically, thus supporting demand for local products and services,” he said. The report states that the need for Saudization is due to the Kingdom's young and growing population, coupled with low levels of employment in the private sector where only around 11% of the workforce are Saudis compared to over 90% 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 Saudization 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 the Saudi private sector around SR15 billion in 2013. The levy will lead to the average cost of foreign labor increasing by 21% and will help reduce the difference between the foreign and local wages by 7%. From the companies analyzed in the report, the average impact is around 5% of EBIT (earnings before interest and tax), although the variance is high. Given the charge was introduced in November 2012, the year 2013 will be the first full year impacted by this levy. Industries reliant on low-paid foreign labor and run on low margins will be impacted most by the levy because they usually have low Saudization rates. Such industries include building and construction, which accounts for more than 45% of the total number of workers in the private sector, employing 3.5 million people. Wholesale and retail account for 19%, while manufacturing industries stand at 10%. 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,” mentioned Ghulam. “However, many have accepted the reality of Saudization 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 Saudization program has already led to positive results with around 700,000 locals hired since the recent programs were launched,” added Ghulam. “The major benefits of Saudization will come through in the long-run despite the short-run margin pressures due to wage inflation for the private sector.” “Saudization programs 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 annum in the population over the coming few years, double the global average of 1.1%. — SG
