PUBLIC PUBLIC

Impact Analysis

EXPAT FEES AND CONSUMPTION 26 February 2017

Bird’s Eye View Vol. VII

Asim Bukhtiar, CFA

abukhtiar@fransicapital.com.sa

+966 11 282 6844

Abdullah AlRayes aalrayes@fransicapital.com.sa

+966 11 282 6595

Expat Worker Fee 3 11

Executive Summary 1 3

Dependent Outflow 2 4

TABLE OF CONTENTS

Executive Summary

3

With the introduction of fees on expat dependents and accelerating worker fees through 2020, we assess the

impact on consumption and wage bill

Key Findings – Dependents:

4.3 mn dependents (c. 1.1 mn families) spend an aggregate

SR 88 bn or 3.7% of GDP

Up to SR 20 bn can be collected annually at status quo

Estimate an average 165k dependents will exit annually

through 2020 (16% cumulative decline)

Family size matters: more dependents higher burden

Rising cost of living will accelerate outflow

14% annual cut in household expenditure from 2020,

immediate impact on:

Food, Retail and Services (travel, education, telco)

“Snowball” effect – lower consumption could lead to

redundancies and accelerate outflow leading to decline in

expenditure

Key Findings – Wage Bill:

Some 70% of foreign workers employed in Construction,

Retail, Households and Manufacturing

Est annual gross fee generated on foreign workers could

rise to SR 68 bn by 2020 from SR 4 bn in 2016, assuming:

Workforce size and composition remains constant

No exemptions on certain sectors or job roles

On aggregate level, fee could rise from 1% of expat wage

bill to 21% by 2020

Sectors with lower average monthly wage will see more

pronounced impact through 2020 – ability to pass through to

consumers will be critical

Accommodation & Food: 7% 29%

Retail: 5% 22%

Manufacturing: 3% 16%

02

DEPENDENT OUTFLOW

PUBLIC

Assume around 1.1 mn foreign workers have dependents in KSA

Source: GA Stats, SFC 5

Demographic Makeup

20.1 11.7

Saudi Non-Saudi Total Population (mn)

31.7

Non-Saudi Males 51%

Saudi Males 34%

Non-Saudi

Females 5%

Saudi Females

10%

Workforce Distribution (13 mn)

Workforce

7.4 mn

Dependents

4.3 mn

Assume 4

dependents per

household

1.1 mn

Households

Spouse

265k

Children

796k

Education below

Secondary

5.8 mn Diploma

415k

Bachelor

1.1 mn

Master

67k

Doctorate

44k

Avg Mthly

Wage

SR 4,267

Avg Mthly

Wage

SR 8,798

Avg Mthly

Wage

SR 12,714

Avg Mthly

Wage

SR 17,630

Potential

workforce pool

with dependents

Total = 1.6 mn

• Some 79% of foreign workforce earns

less than SR 3,000 / mth on average –

these have been excluded from

dependent outflow analysis

• Out of the potential workforce pool with

dependents, assume 67% (c. 1.1 mn)

workers have dependents in KSA

PUBLIC

Assuming status quo (constant dependents) could translate to some SR 20 bn in annual fees

Source: GA Stats, GOSI, SFC 6

Workforce Distribution and Fee Potential

Distribution by income bracket of

1.1 mn workers with dependents

Category Income Bracket

(SR / mth)

% of

Pool

Num of

Workers

1 6,000 – 6,999 16% 175,023

2 7,000 – 7,999 13% 135,208

3 8,000 – 8,999 10% 109,238

4 9,000 – 9,999 7% 78,171

5 10,000+ 53% 564,323

Total 1,061,963

Using GOSI

stats as basis

Mthly Fee (SR) 2017 2018 2019 2020

Per dependent 100 200 300 400

Annual fee collected (bn) 5.1 10.2 15.3 20.4 Assume 4.3 mn dependents and status

quo (excluding outflow) through 2020

Key Assumptions:

• Avg number of dependents / employee is key consideration –

wider distribution (fewer dependents) will lower impact while

concentration (fewer but larger families) will have greater burden

• Majority of foreign workers with dependents earn over SR 10,000

per month

• Employees will burden the cost of dependent fee – potential new

hires may incorporate fee into employment contracts

• Cost of living could rise at accelerating pace, including basic

household items, fuel, utilities, education and various services

(insurance) through 2020

• Workers with employer provided housing and education allowance

may see slower pace of outflow – particularly in the SR 9,000 to

SR 10,000 category

• Increased expat fee (applied to workers) will be serviced by

employers, otherwise the outflow could be substantially higher

• No additional expat-specific fee will be applied (e.g. remittance or

income tax)

For a Bachelor degree

holder, fee could be 18%

of average monthly wage

PUBLIC

Estimate 16% net reduction in expat dependents, cumulative 670k, averaging 165k per annum

Source: SFC 7

Dependent Outflow Base Case

SR / mth 2016 2017 2018 2019 2020 Total

6,000

–

6,999

Depends 700,091 665,086 611,879 544,573 462,887 462,887

% outflow 5.0% 8.0% 11.0% 15.0% 33.9%

Net outflow 35,005 53,207 67,307 81,686 237,204

7,000

–

7,999

Depends 540,831 519,198 482,854 434,569 382,420 382,420

% outflow 4.0% 7.0% 10.0% 12.0% 29.3%

Net outflow 21,633 36,344 48,285 52,148 158,411

8,000

–

8,999

Depends 436,952 423,843 398,413 366,540 326,220 326,220

% outflow 3.0% 6.0% 8.0% 11.0% 25.3%

Net outflow 13,109 25,431 31,873 40,319 110,732

9,000

–

9,999

Depends 312,684 306,430 291,109 270,731 249,073 249,073

% outflow 2.0% 5.0% 7.0% 8.0% 20.3%

Net outflow 6,254 15,322 20,378 21,658 63,611

10,000+

Depends 2,257,293 2,252,779 2,234,757 2,201,235 2,157,210 2,157,210

% outflow 0.2% 0.8% 1.5% 2.0% 4.4%

Net outflow 4,515 18,022 33,521 44,025 100,083

Total depends 4,247,851 4,167,336 4,019,011 3,817,647 3,577,811 3,577,811

Net outflow 80,515 148,325 201,364 239,837 670,040

16% drop in

dependents by 2020

Relatively insensitive

to dependent fee but

overall increase in

cost of living could

accelerate outflow

Most sensitive to

fees

Assume this

segment receives

employer provided

housing & education

PUBLIC

Average dependent outflow could range between 87k and 250k per annum

Source: SFC 8

Sensitivity Analysis

Base Case 2017 2018 2019 2020 Cumulative

% outflow 1.9% 3.6% 5.0% 6.3% 15.8%

Total outflow 80,515 148,325 201,364 239,837 670,040

Case 1 %

outflow

Total

outflow

2017 1.0% 42,479

2018 1.5% 63,081

2019 2.5% 103,557

2020 3.5% 141,356

Cumulative 8.3% 350,472

Case 2 %

outflow

Total

outflow

2017 3.0% 127,436

2018 4.5% 185,419

2019 6.5% 255,775

2020 8.5% 312,734

Cumulative 20.7% 881,363

Case 3 %

outflow

Total

outflow

2017 3.2% 135,931

2018 5.0% 205,596

2019 7.5% 292,974

2020 10.0% 361,335

Cumulative 23.4% 995,836

Avg out / year = 87,618 Avg out / year = 220,341 Avg out / year = 248,959

PUBLIC

Cut of SR 13.9 bn annually on household items expected from 2020 onwards

Source: GA Stats, SFC 9

Consumption Impact

Median Monthly Household Spend SR 6,930

Food 18% Tobacco

1%

Clothes 6%

Housing & utilities 21%

Furnishing 7%

Healthcare 2%

Transport 9%

Telecom 6%

Entertain 3%

Education 3%

Restaurants 5%

Misc 20%

1.1 mn

Households

Annual expenditure

SR 88.3 bn

or

3.7% of GDP

Expected cut in

expenditure by 2020

Base

SR 13.9 bn

Case 1

SR 7.3 bn

Case 2

SR 18.3 bn

Case 3

SR 20.7 bn

Expected cut

in expenditure

by 2020

Most exposed components will be

Housing & Utilities, Food,

Transport, Furnishing and Clothes

19% of aggregate

household expenditure

What’s different this time around?

In 2014, efforts to reduce undocumented workers gained

momentum , resulting in 1 mn outflow of workers. Consumption

was not impacted because: 1) most were not significant spenders

and 2) headcount was largely replaced by documented workers.

Families spend on clothes, education, school supplies, travel.

PUBLIC

Revenue impact on listed Retail and Food companies estimated at SR 1.2 bn and SR 1.5 bn, respectively, from 2020 onwards

Source: Tadawul, SFC 10

Sector View

• Increased employment of Nationals may offset some

consumption cut (e.g. house rent, furnishing)

• Will be gradual replacement

• May not immediately offset impact of departing

families

• Some sectors will face immediate impact, for example:

• Food

• Retail (household goods, school supplies,

electronics, apparel) – more pronounced if

higher income families exit

• Restaurants

• Services (travel / transport, education,

healthcare, telecoms)

• Some sectors may be relatively unaffected:

• Banking and insurance – offset by new entrants

in workforce

• Petchems and fertilizers – export oriented

• Cements and building materials - infrastructure

Retail Case Study – Listed Companies (SR)

Aggregate household retail spend (bn) 160

Spend by expat families (bn) 31

2016 total revenues – listed cos (bn) 41

Spend by expat families – listed cos (bn) 8

From 2020 on: Base Case 1 Case 2 Case 3

Consumption cut 16% 8% 21% 23%

Revenue impact (bn) 1.2 0.6 1.6 1.8

Food Case Study – Listed Companies (SR)

Aggregate household food spend (bn) 83

Spend by expat families (bn) 16

2016 total revenues – listed cos (bn) 49

Spend by expat families – listed cos (bn) 9

From 2020 on: Base Case 1 Case 2 Case 3

Consumption cut 16% 8% 21% 23%

Revenue impact (bn) 1.5 0.8 2.0 2.2

02

EXPAT WORKER FEE

PUBLIC

Left-to-right: activities with highest numbers of foreigners employed

Source: GA Stats, SFC 12

Worker Distribution by Main Activities

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Co

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& v

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Tra

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Adm

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He

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Oth

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Pro

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Info

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Non-Saudi Saudi

5.2 mn foreigners employed in

Construction, Retail,

Households and Manufacturing

60% of Saudis employed in

Public Admin and Education

PUBLIC

Fee on foreign workers could generate up to SR 68 bn per annum, assuming constant workforce size and mix

Source: GA Stats, Fiscal Balance Program, SFC 13

Fee Potential Size

Mthly Fee (SR) 2017 2018 2019 2020

# expats equaling Saudis - 300 500 700

# expats exceeding Saudis 200 400 600 800

Gross fee

generated in

2016

SR 4 bn

Assuming no

exemption Gross fee

potential in

2018

SR 33 bn

Gross fee

potential in

2019

SR 51 bn

Gross fee

potential in

2020

SR 68 bn

Fees on foreign workers set to increase and

accelerate between 2018 – 2020 and applied to all

Non-Saudi workers

• Assume status quo through 2020:

• Constant workforce size and mix

• No change in economic conditions

• No change in labor regulations

• No exemptions by sector or job role

• Potential fees collected could be c. SR 68 bn

annually by 2020

• Comprising 45% of SR 152 bn target of

generating revenue from fees and taxes

by 2020

• Potential outcome could be:

• Significant shift in workforce size and

composition

• Relief for some sectors and roles

• Headcount reduction, mainly across

small and medium enterprises

• Actual amount collected may be lower

than status quo estimate

PUBLIC

Activities with lower average wage bill will be most impacted by escalating fees (e.g. Food Services, Retail and Manufacturing)

Source: SFC 14

Fee as a Ratio of Foreign Wage

Aggregate foreign annual wage (all activities)

SR 331 bn

0%

5%

10%

15%

20%

25%

2016 2017 2018 2019 2020

Fee-to-wage ratio

0%

4%

8%

12%

16%

20%

2016 2017 2018 2019 2020

Fee-to-wage ratio

0%

5%

10%

15%

20%

25%

2016 2017 2018 2019 2020

Fee-to-wage ratio

0%

7%

14%

21%

28%

35%

2016 2017 2018 2019 2020

Fee-to-wage ratio

Manufacturing

Wholesale, Retail and Vehicle Repair Accommodation and Food Services

Saudi Fransi Capital LLC

749 King Fahad Road

Crossing Mohammad Bin Abdulaziz Street (Al Tahlia Street)

P.O. Box 23454

Riyadh

Saudi Arabia

Commercial Registration 1010231217

CMA License 11153-37

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