GCC Labor Market

The Effects of Financial Crisis on GCC Labor Market

Introduction

Is the Financial crisis will remain a purely Western crisis which is so called the coupling effect? Many Middle Eastern countries and observers in emerging markets ask themselves and wonder of this question. In the Year 2008, few had foreseen the carnage that the world economy will ever unleash as government made the move to save the financial global system

In November 2008, the crisis had reached the Middle East countries and the gulf areas where caused the bank financing and credit to freeze of working, projects of construction had been denied and cancelled, prices of oil had fallen dramatically.

As a result of this collapse, the Investment sector was damaged first where the value of the assets internationally collapsed and later, Construction and Real estate sectors followed this damage because of their dependence on getting loans from the ban financing. Plus, prices went down; billions of dollars got wiped off, and all because of the falling property prices.

Because the GCC countries heavily depend on debt financing and international trends, the crisis had hit the Gulf countries in a heavy weight. For example: Dubai and the UAE had big damages because of the crisis, seeing economic growth plummet from 7.4% in 2008 to -3.5%.

This paper will outline the effects on GCC labor markets by the financial crisis by showing and examining the recent data of the GCC labor market aiming in evaluating the results to explain the reasons of the government's involvement to maintain solid conditions of their economies and stimulating the financial sector to get over the crisis with minimum loss.

GCC Performance of last year

The crisis caused Kuwait the top 5 largest oil reserves to rank 4 notches to 39th in Global competitiveness ranking of MENA countries. The country's five most problematic factors due to the data by WEF were: restrictive labor regulations, inefficient government, and bureaucracy, and policy instability, access to financing and uneducated workforce. The macroeconomic stability was the only country which had been able to perform the best at 3rd from about 133 countries.

Qatar, the popular third largest gas reserve holder who took the lead among other regions of reaching further 4 positions today. Because of Qatar's abundant natural gas, it continued to weather the economic crisis with depletion period of 100 years. Qatar has a long term gas sale contracts where led it to be well positioned and inherited to short term price because of its natural gas. The rapid flow of revenue and surplus of Qatar has caused the country to move to the competitive direction. The upgrading of the institutional framework continues (9th), and goods and labor markets are more efficient than in previous years, ranked 21st and 14th, respectively. Plus, technology had made a big stride in Qatar for example; mobile telephony (2nd) and broadband (37th), and in opening up to foreign investment.

The 6th largest oil reserve was United Arab Emirates. UAE managed to develop and improve its position by 8 notches to 23rd from 31st earlier. This performance was improved because UAE had upgraded their institutions and their infrastructure with a rising rate of technological readiness and innovative capacity over the past few years which will help the UAE to maintain its competitive area in a longer term period. Unfortunately, UAE will still face problems in the areas of Sustainability of public finances, access to financing, uneducated workforce, restrictive labor regulations and inflation.

Saudi Arabia the 5th largest gas reserve holder dropped to 28th from 27th because of the rigid labor market and the trustworthiness and confidence in the financial sector, which remain low, although they have held up well in the current financial crisis, improving from 98th to 81st. Nevertheless, Saudi Arabia has performed good in the sections of macroeconomic stability at 9th and up-gradation of its public institutions, ranked 28th this year.

Among the GCC countries, Oman and Bahrain are the smallest emirates. They have few reserved gas and oil estimation where their ranking went down to 38th and 41st because of labor regulation restriction, access to government financing and inefficient government bureaucracy.

Theoretical Analysis

The collected data was based on a survey of 900 human resources managers, interviews with top management of selected local and international companies, as well as a review of macroeconomic sources and relevant press literature plus, 24000 professional made a survey who were employed by 3000 largest corporation in the region.

The data of a historical pay outlined in the report was taken from information which was based on and provided by employees through an online English-language questionnaire, suitably screened and statistically analyzed to arrive at the preceding results.

22-60 years old were the age of Respondent who earned an annual income ranging from US$12,000 to US$200,000. Salary forecasts are based on estimates provided by human resources managers .Salary increases were measured for employees who were an ongoing employment and excluded who changed employment during the period. The survey was conducted during September and October 2009 by Gulf Skills Company and other data was collected from Gulf Research Center and GCC Economic Growth

Redundancies by Country

Recruitment Volume by Location

2008

2009 Estimate

% of professionals in each country

2008 (Quarter1-3)

2009 (Quarter1-3)

Qatar

13.4%

9.2%

9%

8%

14%

Bahrain

6.3%

2.9%

12%

6%

4%

Oman

6.4%

2.7%

6%

2%

4%

Kuwait

8.5%

-0.7%

10%

9%

6%

Saudi Arabia

4.3%

-1.0%

7%

14%

20%

UAE (Ex. Dubai)

7.4%

-3.5%

16%

13%

21%

Dubai

48%

31%

Data

As everywhere in the world, the GCC governments reaction was providing banking guarantees as well as injecting billions of dollars into the economy, mostly through investment in major infrastructure projects. After several years of high oil prices, most state treasuries and sovereign wealth funds had accumulated massive reserves which could easily be injected to boost the economy. With only a few exceptions, the region's banking system has been largely stable, thanks to The strong capital bases and limited exposure to Western sub-prime assets has made the banking system stable ,which have brought misery to banks elsewhere in the world. The combinations of government support and low exposure to international trends had helped reduce against the full impact of the global downturn. Resulting better performance than most in the Gulf economies.

Gulf business had seen years of booming and growth, the rigorousness and suddenness of the downturn shocked many. For most companies, the struggle to attract and retain talent in a tight market was replaced almost overnight by a rush to cut costs. Many companies cut on large percentage of their staff, , taking advantage of the region's employer friendly labor laws and a large expatriate workforce,. Total of 10% were laid off over the 12-month period to August 2009. This was highest in the real estate sector at 15%. Among the highest , ranked was, the UAE , with 16% being laid off. The job cuts have been disturbing to the lives of many expatriates. It has not only lacked social security or unemployment benefits, most expats are also required by local immigration laws to leave the country within 30 days of termination. Extremely Competitive market and few new vacancies, the loss of employment has meant an immediate moving of them and their families back to their home countries.

Senior executives were hit on the extreme by the job cuts, with an estimated 13% being laid off..Many were replaced immediately with new hires, at a much lower pay. This was not always an entirely a financial decision, however. The set of skill those managers had acquired, that were hired during the boom to deal with the challenges of growth, did not have the same ability to deal with tough times of a major downturn. On nationality criteria, Western nationals were mostly affected by the job cuts, with 13% being laid off, and that is because they represented much more amongst senior management of companies. This was highest in the UAE, were 18% or almost one in every five Western nationals lost their jobs.

While many job cut offs many were aimed at reducing costs, much were used as an advantage by companies to cut back on the number of employees and get rid of underperforming staff, especially after years of growth which had resulted in compromises on the quality and ability of new hires. Companies also resorted to other means to cut costs , staff compulsory leaves, unpaid or at half-pay, as well as reducing the number of hours worked and hence salaries, as a result reduced business. There was an atmosphere of gloom and uncertainty and that is due to the job insecurity and salary which resulted in having a very negative impact on the motivation of employee and their engagement although staff retention has quiet improved during the downturn,. Some companies continued to report that they were stressed and worried at the prospect of the fact that they may be losing their high-performing employees.

Unlike the US and Europe, the Gulf's liberal labor laws have given companies almost full flexibility to hire and fire as they wish. On the other hand nationals enjoyed some level of job security, this was not a much of a concern for companies, as national's large-scale layoffs were never required. At the same time, faced with tough nationalization targets and high attrition rates among nationals, retention was a far greater concern. In the first quarter of 2009 this somehow changed, when the news that numerous UAE nationals were also being made lay off as part of a downsizing which caused much objection. An announcement followed this uproar that companies were not permitted to terminate the UAE nationals, except for one condition and thesis gross misconduct. The news caused much of an uproar in the UAE business community. At that time similar signals were given by other GCC governments, including in Saudi Arabia, Kuwait and Bahrain, though not always explicitly stated.

In the short term, these policies seem to have protected the jobs of many nationals in the current period of crisis or downturn. Many firms stating that they had retained their national staff, even when many of them has no work for them to do, while those firms made a considerate number of their expatriate staff leave. This resulted in some employers to become more cautious and selective in hiring nationals, conscious that it would be difficult and challenging to fire them.

Issue of increasing employment opportunities for nationals is rising continuously... With less jobs being created in a slower economy while large numbers of young nationals graduating and continuing to enter the workforce every year, government pressure is likely to increase on companies to take up more nationals by replacing their expatriate staff.

Bahrain Saw the first year of implementation of the first phase of labor market reforms One of the most necessary approaches to the nationalization issue in the Gulf, the reforms had been debated between the government and business leaders for four years. The original reform was developed in 2004 proposed end all nationalization quotas as well as all restrictions on employment of expatriates. In an effort to recruit Bahraini national by private firms, firms would be charged a levy of around US$3,000 per year for every expatriate they employed. The fees would be collected would go into a fund and be invested in the training of Bahraini nationals. As a result of all that there was Strong objection from the businesses on the high fee US$ 3,000/- levy that the government forced as a result the government reduced it but to keep the quotas in place. The fee is just US$ 300 per year, insufficient in making much of a difference to companies in their decisions to hire between nationals and expatriates. The system has achieved its initial goal of increasing employment though market than regulatory pressure but resulted in generating funds for the training of young nationals.

Recruitment has slowed down significantly with most businesses no longer expanding, with a lot of firms putting formal hiring freezes in place. Recruitment has not stopped, but replacement hiring has continued, while specialist skills continue to be in demand. Some employers have took this opportunity to replace underperforming staff with higher competent professionals who were either unavailable or unaffordable during the time of the boom. Recruitment this year has also become much more thorough, employers demanding a much higher standard of candidates and putting them through a much tougher selection process. This resulted in a much longer recruitment cycle than it was before. With fewer jobs and higher competition, the opportunistic job in the boom days seem like something in the past. Having seen their colleagues lose their jobs many candidates have been forced on to the job market, as a result of staff cuts or the feeling of job insecurity, Many others preferred to hold on to their secure positions until the storm has subsided,

One of the biggest developments of 2009 was the dramatic fortune in Dubai; Dubai was the fastest-growing hub attracting much of the expatriate talent, to the city experiencing most severe downturn. This huge and sudden change has released a large percentage of human capital to be used by other parts of the reign. Dubai's share of advertised vacancies in the GCC fell from 48% during the first 9 months of 2008, to just 31% during the same period in 2009. By contrast, Abu Dhabi, Qatar and Saudi Arabia saw their shares increase considerably. An analysis shows that, among expatriates living in Dubai, the percentage who work in Abu Dhabi has tripled over the last year from 1% to 3%, a trend also seen in the increased traffic on the 120km highway connecting the two cities. This excludes a much larger group who has shifted their residence to Abu Dhabi, as well as those who serve Abu Dhabi-based clients from their offices in Dubai.

In addition, companies with a regional portfolio have been able to authorize internal staff relocations, some of which would have been impossible during the boom days due to employee preferences. This newly gained power of employers to redistribute staff, in addition with the greater supply of skilled professionals in the market, has enabled them to grow their business in parts of the region when before they were struggling due to severe staff shortages, thus reducing the fall-out from the downturn. The Saudi economy, its massive size and continued growth in many sectors, has been a blessed this year, becoming the largest source of income for many firms across the region. The Kingdom has benefited from this trend, with several infrastructure projects coming to life with arrival of new people. Similarly it has been viewed in Abu Dhabi and Qatar. Despite the forced circumstances, preferences for many employee preferences have not changed. The UAE and Dubai in particular, remain the place of choice for many expatriates. Over half of expatriates point the UAE as their favorite location. This shows that the movement out of the UAE will be short-lived and many are likely to go back, as soon as recovery returns to the country and firms start to hire in earnest.

Attraction

Retention

Salary Increase by Country %, 12-months to August

Inflation

% of GCC-based expats outside each country who wish to relocate into it

% of expats within the country who wish to remain there

2008

2009

%, 2009 Estimate

Qatar

30%

37%

12.7%

6.8%

-3.9%

Bahrain

11%

55%

10.5%

6.7%

3.0%

Oman

8%

49%

12.1%

8.4%

5.3%

Kuwait

6%

57%

10.1%

4.8%

5.7%

Saudi Arabia

21%

51%

9.8%

6.5%

5.0%

UAE

52%

74%

13.6%

5.5%

1.5%

Average salary increases in the Gulf dropped sharply to 6.2% from an average of 11.4% last year. More strikingly, almost 60% of employees received no pay increase at all, compared to just 33% over the same time last year. The balance of power shifting to employers this year, the increases observed had much to do with the previous year and previous inflationary trends that had yet to be reflected into pay packages. Most increments this year either took effect or had already been promised prior to January 2009, when the full extent of the slowdown gripping the region started to become apparent. Collected data confirms that, after January, the pace of salary increases slowed down significantly relative to the same period last year.

On a regional basis, Oman secured the largest average increase at 8.4%, though still much lower than last year. Qatar, Bahrain and Saudi Arabia had similar increases of round 7%. Kuwait had the smallest rise at just 4.8% while professionals in the UAE saw a pay increase of 5.5%, down sharply from 13.6% in the previous year. On a sector basis, accounting and audit companies saw the biggest average rise at 7.9%, as concern about the financial health of firm's boosted demand for audit services. Next was construction at 6.8%, down sharply from last year's figure of 15.1%. This reflects partly the huge momentum in the sector's pay rises carried over from last year, as well as growth in infrastructure projects. Investment firms offered the smallest pay rises this year. In terms of job categories, audit professionals saw the biggest increase at 7.5%, given increased demand following the crisis. On the other hand, with the region's huge recruitment drive slowing down, human resource professionals found their skills no longer in demand, seeing their pay increase plummet from 12.1% last year to just 4.8%, the lowest increase this year among all professionals.

The smaller increases in base salaries, while major, do not capture the full spectrum of measures instituted by companies on the compensation front. Bonuses saw a drastic cut in 2009. This was most noticeable was in investment banking and top management positions across all sectors, where the bonus are much over half of the total package. Companies have cunningly passed much of the business risk to their employees; they assured the withdrawal of the base salary from sales staff and forced them to work on commission-only contracts. With the alternative being laid off in a tough market, many employees had no alternative but to take the offer. The Companies took advantage of their improved bargaining position, which caused one-third of companies hiring new recruits at lower pay than their existing staff. Some companies even went for pay cuts for all existing staff.

For the first time in years, inflation has been quite low this year and, in parts of the region, even negative. The craze rise in accommodation costs has finally come to a stop. Dubai and Doha, which had seen the most crazy rent increases previously, saw rents fall by 30 to 50 percent as demand fell while new developments continued to come on. Many residents benefitted from the fall, some cutting their housing expenditure, while others used the opportunity to move to more popular neighborhoods. The percentage of professionals working in Dubai who live in Sharjah declined this year from 20% to 18%, with many moving to live in Dubai. Other factors contributing to lower inflation have been the fall in global commodity prices, as well as a strengthening of the US dollar in the early part of the year, which brought down the cost of imports to the GCC.

Western partners, human rights groups and international labor Organizations had put pressure on the GCC governments which had gradually increased safeguards and protections for employees; this trend has continued this year, with several important developments.

Earlier this year, the Kuwaiti government has released the draft of a new labor law, specifying much stronger protections for employees and far more rights. The draft law is being discussed in the parliament. This follows the UAE's proposed new labor law which, in a pioneering move, was published online in 2007 for public consultation and comment. However, the UAE initial draft still remains under review and it is not clear when it may be finalized and signed into law.

No-Objection Certificate' or NOC is a feature found in most of the Gulf countries .This forces expatriates to obtain the approval of their employers before moving to another job. This policy helped achieve higher retention less salary inflations it also protected employer's investment in employees; this has bought inefficiencies into the labor market, candidates did not fill in the roles that best suit them. It has also lead to a loss of skilled labor, as some professionals had to seek for better prospects in other places other than the Gulf. Governments now are beginning to get rid of such policies. As part of the broader labor market reforms Bahrain had been forced to lift the restriction this year, Kuwait has followed its example and has removed the NOC requirement from large segments of the expatriate workforce. Oman had done it to before. In UAE There is an increase in mobility of employees under the policy which is less formally articulated The policy in the UAE is less formally articulated, but it appears that the range of sectors and circumstances under which free movement of employees can take place is growing. Saudi Arabia and Qatar still largely retain the restriction.

Conclusion

Although the loss of jobs has somehow stabilized, it has not yet come to an end

An estimated 15% of firms in the region are thought to be continuing to further cut during the fourth quarter of 2009, highest percentage being shown in UAE which is estimated to be about 20%. The first cut off Job losses was a result of the first shock of the turmoil, the current trend is more study based statistically, based on re-organization studies conducted in large firms. The ongoing merger and consolidation activity is also resulting in rationalization of workforces and additional job losses. As a result, the current round of job cuts is likely to be longer-lasting in nature, with some jobs potentially lost forever.

At the same time, 51% of companies have made plans to expand their staff, in modest numbers, and that is making much for the jobs being cut. it is estimated during the first quarter of 2010 that rate of recruitment is going to increase, as confidence returns, but is improbable to reach the boom levels for quite some time. Companies will only start recruiting at large scale after viewing a constant period of growth. the exercises of 2009 has made companies more aware and more efficient in their use of human capital. As such, the need to increase human resources to support their expanding business will be much less than before

There is optimism on the fate of the Gulf economies which has slowly been rising in recent months, though as of yet there are few facts indicating to a sustained recovery. The oil price, which was the biggest driver of long-term growth in the region, has risen significantly in recent months, but remains still far from the all-time peak it reached in 2008.

More importantly, the slowdown in credit markets and bank financing has loosened up, allowing private sector investment to start again potentially. On the negative side, cash flow continues to pose a challenge, with many firms still struggling with the collection of their receivables, and banks suffering from a growing amount of bad debt.

The impact of the recent announcement of debt restructuring by Dubai World remains to be seen. In particular, any dent in regional business confidence could further delay recovery.

Presently, most Gulf economies are expected to have respectable growth rates of 3-4% in 2010, with the exception of Qatar which is forecast to grow at a staggering 24%, as major gas projects come on course.

There are no factors to pressure to increase in regards to on salaries. The competition for talent is reasonable regionally and internationally, and inflation remains much under control. At that, the increases in pay are much likely to be very moderate over the coming year. In the Gulf Salaries are forecast to rise at an average rate of 6.3% next year. The highest is expected in Oman at 9.7% and lowest in Kuwait at 4.2%.

Finally, the efforts of the GCC government to contain the effects of the financial crisis took varying degrees. But it in general the performance of GCC economies and labor markets were better than other comparable countries. Such efforts must be continued by injecting new large and infrastructure projects in order to create new job opportunities and stabilize the job market. Long-term investments will grant the steady improvement and stable growth. In the meantime, governments must observe the economic conditions with closer eye and prepare for any unhappy surprises.

References:

Nafaes International Group

www.globalinv.net

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