x Abu Dhabi, UAEFriday 21 July 2017

Labour law shadow over Saudi shares

Markets Preview: Regional investors will be eyeing developments in Saudi Arabia closely this week, as a recent labour law meant to reduce the number of foreign workers in the kingdom is expected to slash profits.

Saudi Arabia's construction and property sector will be particularly hit hard as the new labour law comes into effect. Fahad Shadeed / Reuters
Saudi Arabia's construction and property sector will be particularly hit hard as the new labour law comes into effect. Fahad Shadeed / Reuters

Regional investors will be eyeing developments in Saudi Arabia closely this week, as a recent labour law meant to reduce the number of foreign workers in the kingdom is expected to slash profits, particularly for the construction sector.

The government is preparing to impose an annual fine of 2,400 riyals (Dh2,349) for each expatriate worker in companies with a majority of foreign workers.

The decision has attracted criticism from businesses across several industries in the kingdom, with the expectation of lower profits and higher prices.

Among the sectors to be affected the most are contracting, construction and property, said Farouk Miah, the head of equities research at NCB Capital. The industrial, transport, agricultural and retail sectors are also expected to be affected.

"Corporates that have low Saudisation and a lot of foreign staff will be hit and some of the small and medium enterprises surviving on relatively low profits could go bust," Mr Miah said.

Al Marai, a dairy producer, and Al Hokair, a retail outlet and contracting firm Al Khodari, were among the companies he said could be affected by the new labour law.

The new regulation introduced last month increased the cost of foreign worker permits from 100 riyals per year to 200 riyals a month.

Companies will be charged the higher fee only on foreign employees that outnumber local employees.

The fine will "increase costs at construction companies by 25 per cent and the total proceeds of the fine are estimated to reach 4.8 billion riyals" as the estimated number of foreign workers in the sector is 3 million, Mr Miah said.

The Tadawul All-Share Index yesterday advanced 0.8 per cent to close at 6,823.80.

"The valuations are very pressed, at 12 times earnings, a historical low for the stockmarket," said Hisham Tuffaha, an independent financial analyst in Riyadh. "The average is between 16 and 20 times earnings, during an average of 2 to 3 per cent growth in the kingdom."

The business community has been vocal in its objections to the new labour law.

"The Saudisation drive will continue and the cost for the employer will continue. They prefer to employ non-Saudis because it's cheaper, while the government is trying to make non-Saudis more expensive," Mr Miah said.

More than one million Saudi Arabian nationals receive unemployment benefits, said Khaled Al Ajmi, a labour ministry official, in March.

The Hafiz programme, which pays unemployed Saudis 2,000 riyals a month for as long as one year, was announced in the spring of 2011 by King Abdullah bin Abdulaziz Al Saud and was introduced late that year.

"The aim of the new regulation is to reduce the unemployment among Saudis, which is said to be 40 per cent for people under 25 years old," Mr Miah said. "We believe this will also help the government in passing some of the cost of unemployment to the private sector."

Because of a decades-long population boom, the Saudi government can no longer afford to reduce unemployment by creating public-sector jobs.

The new regulation should bring some benefit in the long term, Mr Miah said.

"That money will stay in the country, which means more spending on consumer items and others, rather than being remitted abroad," he said. "In the long term it is needed and beneficial to the country."

Saudi Arabia needs to create 3 million jobs for nationals by 2015 and 6 million by 2030, said Adel Fakeih, the labour minister, in January.

In the UAE last week, the Abu Dhabi Securities Exchange General Index closed down 2.3 per cent to 2,612.17 points, while the Dubai Financial Market General Index also fell, by 1.5 per cent to 1,584.52.

halsayegh@thenational.ae

* with Reuters