Gulf labor nationalization may preserve social stability, but also raise labor costs – Moody’s

Gulf Cooperation Council countries have been largely dependent on expatriate labor. (AFP)

• ‘Nationalization strategies can have both credit positive and negative implications for sovereigns’
• Currently, most Gulf nationals prefer public sector jobs over private sector employment

DUBAI: Efforts by Gulf Cooperation Council (GCC) countries to employ their nationals may meet social objectives, but it would be at a higher price and cost to diversification, Moody’s Investors Service said in a report this week.
“Rapid GCC population growth is leading to increased demand for jobs as new entrants join the market and only modest numbers of workers retire. Social changes will compound higher employment demand, particularly if more women enter the workforce,” the credit ratings agency noted in its report “Sovereigns — GCC, Labour market nationalization aims to curb unemployment but may raise labor costs and hamper diversification.”
“Nationalization strategies can have both credit positive and negative implications for sovereigns. It will be credit positive if these strategies are effective in providing wider job opportunities for nationals, while preventing a rise in unemployment and as a result maintain social and political stability,” Moody’s said. “However, large increases in public sector wage bills for the government to accommodate an increasing number of nationals in the administration would reduce fiscal flexibility and, in some cases, weaken fiscal strength.”
The Gulf nations’ dependence on expatriate labor, as a 2013 UAE study has shown, indicates that as much as 95 percent of Qatar’s workforce are non-nationals; 94 percent in the United Arab Emirates; 83 percent in Kuwait; 71 percent in Oman; 64 percent in Bahrain and 49 percent in Saudi Arabia. GCC states have launched their own nationalization initiatives: Emiratization in the UAE; Saudization in Saudi Arabia; Qatarization in Qatar; Kuwaitization in Kuwait; Bahrainization in Bahrain and Omanization in Oman.
“Relative to the current size of the job market, the number of new jobs for nationals needed in the next two decades to meet labor market and social objectives is highest in Saudi Arabia, Oman and to a lesser extent Kuwait,” Moody’s said. “Social and political tensions could rise if the nationalization plans fail to increase employment sufficiently. Nonetheless, the authorities will find it challenging to create sufficient private sector opportunities to halt rising unemployment, at least over the near-term.”
Currently, most Gulf nationals prefer public sector jobs over private sector employment because of better work conditions, higher salaries, shorter working hours, greater job security and more comprehensive packages. This job preference means higher public sector wage bills, and could reduce the Gulf governments’ fiscal flexibility and, in some cases, weaken fiscal strength.
“The size of the challenge is greatest where nationals comprise a relatively large share of their total populations, unemployment is relatively high, and there is less capacity to absorb new entrants into the public sector,” said Thaddeus Best, a Moody’s analyst and co-author of the report.