Impact Analysis

26 February 2017
EXPAT FEES AND CONSUMPTION Birds Eye View Vol. VII

Asim Bukhtiar, CFA Abdullah AlRayes

abukhtiar@fransicapital.com.sa aalrayes@fransicapital.com.sa
+966 11 282 6844 +966 11 282 6595

PUBLIC
TABLE OF CONTENTS

1 Executive Summary 3

2 Dependent Outflow 4

3 Expat Worker Fee 11

Executive Summary
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%
3
 02
DEPENDENT OUTFLOW
 Demographic Makeup
Assume around 1.1 mn foreign workers have dependents in KSA

Saudi Non-Saudi Total Population (mn) Workforce Distribution (13 mn)

20.1 11.7 31.7

Saudi
Males
Potential Non- 34%
workforce pool Saudi
with dependents Males
Workforce Dependents
Total = 1.6 mn 51%
7.4 mn 4.3 mn
Saudi
Assume 4 Females Non-
dependents per 10% Saudi
Education below household Females
Avg Mthly 5%
Diploma Secondary
Wage 5.8 mn
SR 4,267 415k
1.1 mn Some 79% of foreign workforce earns
Avg Mthly
Bachelor Households less than SR 3,000 / mth on average
Wage these have been excluded from
SR 8,798 1.1 mn
dependent outflow analysis
Avg Mthly
Master
Wage Out of the potential workforce pool with
SR 12,714 67k Spouse Children dependents, assume 67% (c. 1.1 mn)
265k 796k workers have dependents in KSA
Avg Mthly
Doctorate
Wage
SR 17,630 44k

Source: GA Stats, SFC 5

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 Workforce Distribution and Fee Potential
Assuming status quo (constant dependents) could translate to some SR 20 bn in annual fees

Distribution by income bracket of
1.1 mn workers with dependents
Using GOSI
stats as basis
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
For a Bachelor degree
holder, fee could be 18% Majority of foreign workers with dependents earn over SR 10,000
of average monthly wage per month

Employees will burden the cost of dependent fee potential new

Income Bracket % of Num of hires may incorporate fee into employment contracts
Category
(SR / mth) Pool Workers
Cost of living could rise at accelerating pace, including basic
1 6,000 6,999 16% 175,023 household items, fuel, utilities, education and various services
(insurance) through 2020
2 7,000 7,999 13% 135,208
3 8,000 8,999 10% 109,238 Workers with employer provided housing and education allowance
may see slower pace of outflow particularly in the SR 9,000 to
4 9,000 9,999 7% 78,171 SR 10,000 category
5 10,000+ 53% 564,323 Increased expat fee (applied to workers) will be serviced by
Total 1,061,963 employers, otherwise the outflow could be substantially higher

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

income tax)
Mthly Fee (SR) 2017 2018 2019 2020
Per dependent 100 200 300 400
Assume 4.3 mn dependents and status
Annual fee collected (bn) 5.1 10.2 15.3 20.4 quo (excluding outflow) through 2020

Source: GA Stats, GOSI, SFC 6

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

SR / mth 2016 2017 2018 2019 2020 Total

Depends 700,091 665,086 611,879 544,573 462,887 462,887
6,000 Most sensitive to
% outflow 5.0% 8.0% 11.0% 15.0% 33.9% fees
6,999
Net outflow 35,005 53,207 67,307 81,686 237,204

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

7,000
% outflow 4.0% 7.0% 10.0% 12.0% 29.3%
7,999
Net outflow 21,633 36,344 48,285 52,148 158,411

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

8,000
% outflow 3.0% 6.0% 8.0% 11.0% 25.3%
8,999
Net outflow 13,109 25,431 31,873 40,319 110,732

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

9,000 segment receives
% outflow 2.0% 5.0% 7.0% 8.0% 20.3% employer provided
9,999 housing & education
Net outflow 6,254 15,322 20,378 21,658 63,611

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

to dependent fee but
10,000+ % outflow 0.2% 0.8% 1.5% 2.0% 4.4% overall increase in
cost of living could
Net outflow 4,515 18,022 33,521 44,025 100,083 accelerate outflow
Total depends 4,247,851 4,167,336 4,019,011 3,817,647 3,577,811 3,577,811 16% drop in
dependents by 2020
Net outflow 80,515 148,325 201,364 239,837 670,040

Source: SFC 7
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 Sensitivity Analysis
Average dependent outflow could range between 87k and 250k per annum

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

% Total % Total % Total

Case 1 Case 2 Case 3
outflow outflow outflow outflow outflow outflow
2017 1.0% 42,479 2017 3.0% 127,436 2017 3.2% 135,931

2018 1.5% 63,081 2018 4.5% 185,419 2018 5.0% 205,596

2019 2.5% 103,557 2019 6.5% 255,775 2019 7.5% 292,974

2020 3.5% 141,356 2020 8.5% 312,734 2020 10.0% 361,335

Cumulative 8.3% 350,472 Cumulative 20.7% 881,363 Cumulative 23.4% 995,836

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

Source: SFC 8
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 Consumption Impact
Cut of SR 13.9 bn annually on household items expected from 2020 onwards

Median Monthly Household Spend SR 6,930 1.1 mn

Households Most exposed components will be
Housing & Utilities, Food,
Transport, Furnishing and Clothes
Annual expenditure
Misc Food
20% 18% Tobacco
1%

Clothes SR 88.3 bn 19% of aggregate

Restaurants 6%
5%
or household expenditure
3.7% of GDP
Education
3%
Entertain Housing &
3% Telecom Case 1
utilities Expected cut in
6%
21% SR 7.3 bn
expenditure by 2020
Transport Expected cut
9%
in expenditure
by 2020
Healthcare Furnishing
2% 7% Base Case 2
SR 13.9 bn SR 18.3 bn

Whats different this time around?

In 2014, efforts to reduce undocumented workers gained Case 3
momentum , resulting in 1 mn outflow of workers. Consumption SR 20.7 bn
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.

Source: GA Stats, SFC 9

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

Increased employment of Nationals may offset some Retail Case Study Listed Companies (SR)
consumption cut (e.g. house rent, furnishing) Aggregate household retail spend (bn) 160

Will be gradual replacement Spend by expat families (bn) 31

May not immediately offset impact of departing 2016 total revenues listed cos (bn) 41
families
Spend by expat families listed cos (bn) 8
Some sectors will face immediate impact, for example: From 2020 on: Base Case 1 Case 2 Case 3

Food Consumption cut 16% 8% 21% 23%

Retail (household goods, school supplies, Revenue impact (bn) 1.2 0.6 1.6 1.8
electronics, apparel) more pronounced if
higher income families exit
Restaurants Food Case Study Listed Companies (SR)
Services (travel / transport, education, Aggregate household food spend (bn) 83
healthcare, telecoms)
Spend by expat families (bn) 16
Some sectors may be relatively unaffected: 2016 total revenues listed cos (bn) 49

Banking and insurance offset by new entrants Spend by expat families listed cos (bn) 9
in workforce From 2020 on: Base Case 1 Case 2 Case 3
Petchems and fertilizers export oriented
Cements and building materials - infrastructure Consumption cut 16% 8% 21% 23%
Revenue impact (bn) 1.5 0.8 2.0 2.2

Source: Tadawul, SFC 10

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 02
EXPAT WORKER FEE
 Worker Distribution by Main Activities
Left-to-right: activities with highest numbers of foreigners employed

Non-Saudi Saudi
2,500,000
5.2 mn foreigners employed in
Construction, Retail,
Households and Manufacturing
2,000,000
60% of Saudis employed in
Public Admin and Education
1,500,000

1,000,000

500,000

Education

Mining
Other

Arts
Admin
Manufacturing

Water supply
Retail & vehicle repair

Agriculture

Infotech
Households

Transportation

Financial services

Real estate

Electricity supply
Construction

Public admin & defense

Accommodation & food

Health & social work

Professional & scientific

Source: GA Stats, SFC 12

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

Fees on foreign workers set to increase and

Mthly Fee (SR) 2017 2018 2019 2020 accelerate between 2018 2020 and applied to all
# expats equaling Saudis - 300 500 700 Non-Saudi workers

# expats exceeding Saudis 200 400 600 800 Assume status quo through 2020:

Constant workforce size and mix

No change in economic conditions
Gross fee No change in labor regulations
potential in No exemptions by sector or job role
2020
SR 68 bn Potential fees collected could be c. SR 68 bn
annually by 2020
Gross fee
potential in Comprising 45% of SR 152 bn target of
2019 generating revenue from fees and taxes
SR 51 bn by 2020
Assuming no
exemption Gross fee Potential outcome could be:
potential in
2018 Significant shift in workforce size and
SR 33 bn composition
Relief for some sectors and roles
Gross fee Headcount reduction, mainly across
generated in small and medium enterprises
2016 Actual amount collected may be lower
SR 4 bn than status quo estimate

Source: GA Stats, Fiscal Balance Program, SFC 13

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 Fee as a Ratio of Foreign Wage
Activities with lower average wage bill will be most impacted by escalating fees (e.g. Food Services, Retail and Manufacturing)

Aggregate foreign annual wage (all activities) Manufacturing

SR 331 bn
Fee-to-wage ratio
20%
Fee-to-wage ratio
25% 16%
20% 12%
15% 8%
10% 4%
5% 0%
0% 2016 2017 2018 2019 2020
2016 2017 2018 2019 2020

Accommodation and Food Services Wholesale, Retail and Vehicle Repair

Fee-to-wage ratio Fee-to-wage ratio

35% 25%
28% 20%
21% 15%
14% 10%
7% 5%
0% 0%
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Source: SFC 14
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