S&P Global Ratings today said that Gulf Cooperation Council (GCC) countries are experiencing an accelerating shift in the labour market from an exodus of expatriates, which could weigh on the region’s growth and complicate economic diversification over the long run.
“We expect the population will have declined by just over 4% on average last year across the GCC, mainly due to migrant outflows,” said S&P Global Ratings lead credit analyst for the report, Zahabia Gupta. While some expats will return as the economic cycle recovers, we project the proportion of foreigners in the region will continue to decline. “If these changes are not met with economic and social reforms that foster human capital, they could have repercussions for the regional economy in the long term and pose additional challenges to diversifying away from the GCC’s heavy reliance on the hydrocarbon sector.”
We do not expect these shifts will have an immediate impact on GCC sovereign ratings though, given that the majority of foreign workers returning home filled low-income positions, limiting their contribution to the economy.
The GCC’s high dependence on expat labor–especially in the private sector where it makes up almost 90% of the workforce–has stymied its development of human capital in the national population. The majority of the local workforce is employed by the public sector, which weighs on governments’ fiscal positions, especially in times of lower oil prices. GCC governments are increasingly implementing policies to boost nationals’ participation in the private sector, mainly through measures that restrict the hiring of expats. We believe these nationalization policies could hamper economic growth and diversification if they impede productivity, efficiency, or competitiveness.
The GCC’s longer-term economic trajectory will depend on the strength of governments’ balance sheets as well as their willingness and ability to implement reforms that support a dynamic private sector. “Specifically, we see reforms that improve GCC national populations’ education and skills, the participation of women in the workforce, labor market flexibility, and competition as paramount to unlocking sustainable growth in the region,” Gupta said.
