Localization in GCC – A Vision for Middle Eastern Countries

 GCC (Gulf Cooperation Council) governments have been initiating concerted efforts over the years to effectively implement their ‘Localization’ programs. GCC governments are increasingly focusing on local talent. And the move is to ensure the local population does not slip into the ‘unemployment zone’. Saudi Arabia – the biggest GCC economy – had kickstarted the Saudization program or the ‘Nitaqat’ system on June 11, 2011. Six years down the line, the GCC workforce localization seemingly hasn’t quite taken off.

According to the General Authority for Statistics (GAS), the percentage of Saudis among the total employed people has fallen from 43% in 2013 to less than 39% by Q3 2016. Further, the unemployment rate among the Saudi nationals has increased to 12.1% in the third quarter of 2016. These figures indicate that private sector jobs do not attract Saudis. There is a general perception that private companies are reluctant to absorb locals across various private sector jobs.

The Saudi government had announced a new  ‘Guided Localization” aimed program to achieve Saudization across sectors in March 2016. The Guided Localization in Saudi Arabia was focused on reforming GCC localization policies and practices. Removing youth unemployment is one of the crucial objectives of the government’s Vision 2030 launched last year. However, as the youth unemployment rate has even been rising in 2016, policy makers cannot overlook the fact that their various measures to achieve ‘‘Saudization’ haven’t been a success story as yet.

As we talked about workforce nationalization in Saudi Arabia, the scenario is more or less the same in other GCC countries. Workforce localization in emerging Gulf economies is at stake. Like Saudi Arabia, Qatar is also striving to achieve ‘Qatarization’ with a balanced GCC labor market. However, it has a long way to go before localization in GCC can be termed a success. Qatar Prime Minister Sheikh Abdullah bin Nasser Al Thani made a statement in late 2016 when he stressed the need to appoint Qatari citizens in jobs occupied by foreigners. He was categorical that the Qataris must meet the desired job requirements. The country was targeting to achieve a comparative advantage with 15% of Qataris in private sector jobs for the year 2016. Although Qatar has a remarkably flat unemployment rate, only a fraction of nationals became part of the workforce, indicating that a lot of work remains.

Similar to initiatives by Saudi Arabia, the UAE and Oman have also initiated ‘Localization’ programs decades back. The UAE has cranked up its ‘Emiratization’ program over the last few years or so. One can famously recall how General Secretariat of the Executive Council (GSEC)  laid off around 60-70 foreign staff in July 2013. A Gulf News report stated that the UAE’s Human Resources and Emiratization Ministry is closely monitoring the adherence of private companies to its Emiratization program. The localization in GCC is saddled with obstacles, including wavering workforce nationalization scenarios. Farida Al Ali, assistant undersecretary for employment of national human resources pointed out that private companies in the UAE are not hiring Emiratis because they lacked the necessary language and communication skills and also do not meet the required qualifications or experience.

Oman is striving to effectively implement the recommendations of the National Manpower Employment Forum to boost workforce nationalization – ‘Omanization’. According to media reports, Oman’s Ministry of Manpower has set flexible Omanization targets, with different targets for each industry. The Sultanat, that has seen continuously rising unemployment rates during the last 10 years, is initiating efforts to encourage private companies to hire locals.

Kuwait also unveiled its Kuwaitization” policy decades back but its localization program still leaves a lot to be desired. According to the 2015 Ministry of Planning’ statistics, the Kuwaitis represent around 33% of the 2.2 million labor force. It is pertinent to mention that a majority of the Kuwaitis is holding public sector jobs. As far as the private sector is concerned, the percentage of national labor is still low in comparison to the high percentage of expatriates.

'Bahrainization'. According to the Arabian Business website, companies must adhere to the Bahrainization. That is hiring one Bahraini for every four foreign workers. If companies fail to adhere to the law, they will face penalties. Such a move became necessary after several companies allegedly misused the law. These firms keep Bahrainis on their payrolls only to secure work permits for foreigners and fire them afterward. The Labor Market Regulatory Authority (LMRA) has indicated that it will stop renewing permits if the quota is not adhered to.

So it appears that private companies lack the enthusiasm to hire locals in the GCC region? All GCC governments are facing a local talent crunch. There appears to be a ‘skill mismatch’ in these countries, preventing private companies from hiring locals. There is a need to overhaul the education structure. Of course, this is not to belittle the existing education structure in place. A robust education structure will help GCC nations plug the current skill gap, and set up effective workforce localization in emerging gulf countries. It’s not just the ‘skill’ factor only. Most jobs available in the market, unsatisfactory salary, lack of desired geographic location and inconvenient work hours do not seem to excite the locals. The local populations in GCC  appear to be more interested in better-paying public-sector jobs.

The agenda of localization in GCC countries have a long way to go before it can be termed a success. A strong focus on improving the region’s education structure could facilitate the effective implementation of localization in GCC nations.

Is the Oasis of Tax Free Income Drying Out?

The Gulf region has been a big draw for the expatriate population for many decades now. Expats have been enjoying tax-free salary – surely a motivating factor for foreign workers to flock to the Gulf region. Tax-free salary provides an opportunity to save more, leading to an increase in the disposable income per capita. Hence it is no surprise that the Gulf region is home to a large foreign workforce. The expats comprise around 30 million of the 50 million GCC populations.

Oil export revenues constitute a major income source for Gulf countries. However, since its highs of approximately USD100 a barrel in 2014, the oil prices saw a significant drop. Oil prices have nosedived to around USD29 a barrel in January 2016 and recently recovered to hover around just USD50-55. The prolonged oil price slump since the summer of 2014 has hugely dented oil export revenues. Consequently,  the price slump prompted the GCC governments to explore new revenue-earning avenues.

The jitters grew within the expat population when Saudi Finance Minister Ibrahim Al-Assaf made a statement in mid-2016 that his ministry is intending to introduce an income tax on foreign workers, only to subsequently clarify that it was only a ‘proposal’.

According to the IMF, Saudi Arabia had introduced a personal income tax on both nationals and non-nationals in 1950. Subsequently, the Kingdom had excluded the Saudi nationals within six months of its introduction. Later, the personal income tax on foreign workers was suspended in 1975 amid high oil revenues and the need to recruit expatriates to help build the Kingdom’s infrastructure as well as develop the economy.

The 1980s saw GCC countries introduce a personal income tax on foreign workers during the low oil price period. However, GCC governments had to back down as livid foreign workers, including military contractors, raised the banner of ‘strike’ grounding air force planes.

Due to its unpopularity, imposing personal income tax in the GCC region may be off the table for now. Nonetheless, GCC governments have realized the importance of looking for alternative revenue streams. GCC economies are feeling the pinch over the prolonged dip in oil prices. One has to take into consideration the fact that GCC governments are bracing up to impose a value-added tax (VAT) from 2018 onward in their bid to diversify their revenue base. However, the introduction of VAT is no guarantee that personal income tax will not be introduced in future.

So, what could be the likely ramifications if GCC governments indeed impose a personal income tax on both foreign workers as well as locals? As learned from history, the most immediate consequence might be that foreign workers may just pack up. Such a move can precipitate a labor crunch. This is because foreign workers are still a ‘must-have’ for certain jobs in the GCC region largely for two reasons. Firstly, the local population in the GCC region do not appear to be keen on taking up menial jobs. Secondly, the local population at times, lack requisite skills required for various semi-skilled and skilled jobs performed by expats.

It is pretty clear that a lot will hinge on how oil prices shape up in coming years and how successful GCC governments are enhancing their non-oil revenues that will eventually determine whether expats can continue enjoying tax-free salary in the Gulf region.

European Banking Sector: Effective Implementation of PDS2, MiFid II Holds the Key

The European banking sector has been under stress over the past few years owing to various factors such as low interest rates, massive fines and feeble earnings results. Further, high levels of bad loans continued to be a drag on the European banking system. According to top audit firm KPMG, the European banking sector has around €1.1trillion (£0.94tn) in non-performing loans, almost three times as much compared to the US.

Besides high volume of bad loans, banks are grappling with weak balance sheet strength and inadequate loan loss provisions – all these factors have collectively crimped the performance of European banks. Top banks such as HSBC Holdings, Deutsche Bank and Barclays have all come up with disappointing earnings results. This is in stark contrast to big-ticket U.S. banks such as J.P Morgan, Citi and Goldman Sachs that posted stronger-than-expected profits in 2016, supported by the contractionary monetary policy in the US.

The banking sector clearly has a tough road ahead, but structurally, it is poised for a massive overhaul with the European Commission moving toward implementing the revised Payment Services Directive (PSD2) by January 13, 2018. What is the PSD2 all about and why it has generated so much buzz in the European banking sector? Well, PSD2 is widely seen as a ‘game-changing’ directive that is poised to bring an end to banks’ control over their customers’ account information and payment services and offer third party providers access to customers’ accounts through open application program interfaces (APIs).

This eyeball-grabbing directive is set to transform the payments landscape across the European Union. PSD2, once implemented, will pave the way for bank customers (both consumers and businesses) to use third-party providers to manage their finances. A likely scenario could be that of customers using Facebook or Google to pay their bills, making person-to-person payments (P2P) transfers with their money safely parked in their respective bank accounts.

PSD2 – administered by the European Commission – aims to ensure every EU bank is digitally optimized. In a nutshell, this directive will create cut-throat competition in the payment services market in Europe between banks and new payment service providers (PSPs) as well as drive innovation in the European Fintech industry. More importantly, it will eliminate hidden fees charged by banks. It is seen that banks find it convenient to add transaction fees but now with the market becoming more crowded, banks will have to put their ‘rethinking’ caps on. All these factors will go a long way in ensuring an improved customer experience. In fact, the perceived fierce competition in the banking sector is a big worry for most European banks. According to some estimates, 20-25% of banks could be at risk from the new competitors owing to PSD2.

The advent of PSD2 has triggered talk about whether PSD2 would mark the end of banks’ monopoly over customers’ accounts. Delving deep, it is reasonable to assume that banks are unlikely to lose their significance as far as catering to customer needs are concerned, while granting third party providers access to customers’ account information. The need of the hour for banks is to walk down the ‘reinvent’ path and come up with robust differentiators to stay competitive.

The host of regulatory approvals and licenses required to enter the banking space means that it is never an easy proposition for new entrants. But non-banking FinTech companies, by virtue of PSD2, could find it a lot easier to foray into the market and play a significant role in the future financial landscape.

The European banking sector is also bracing up for the second installment of the Markets in Financial Instruments Directive — better known as Mifid II – considered one of European Union’s most ambitious financial reforms. The challenges of complying with Mifid II – which will come into force in 2018 – lie in ‘how prepared’ asset managers are for so-called unbundling. Under Mifid II, asset managers are required to budget separately for broker research costs and trading costs – a significant departure from decades-old practice of asset managers bundling together trading and broker research costs into a single fee, often receiving research from an investment bank or broker in exchange for using them to carry out trades. Asset managers have two options – either they absorb their research costs or set up a research payment account.

A research conducted by Electronic Research Interchange (ERIC) revealed that 74% of asset managers foresee a reduction in investment bank research. MiFid II is expected to improve quality of research. For instance, if there are more than 400 reports generated for a particular stock, we can end up having a scenario of 50 reports or even less for that stock. This will further enhance requirements for in-depth bespoke research.

It is fair to assume that the effective implementation of PDS2 and MiFid II is of crucial interest to the European banking sector. Effective implementation of these directives will crank up competition in the banking sector, which in turn, will drive consolidation across the European Union and improve customer journey. For sure, PDS2 and MiFid II might pan out to be a short-term pain but would pay rich dividends in the long run.