COVID-19 will change GCC Labor Market forever

Alarm bells have already started ringing for the local labor markets as novel coronavirus disperses and falling oil revenues begin to alter the Gulf economic priorities.

When oil earnings dipped sharply in late 2014, the structural fundamentals were comparable to what OPEC+ members believed they saw in early March 2020. If the late 2014 decline in oil prices and subsequent hit to GCC fiscal resources is any guide to the current oil glut, the signal now to Gulf labor markets is an absolute warning for the things to come. OPEC, with new partners like Russia and Mexico (the “plus”), responded in late 2016 with production cuts that kept prices steady in the range of $50-70 per barrel until the adjustment fell apart on March 5.

Since then, oil prices have been in free fall, reaching under $20 per barrel, as Saudi Arabia remained committed to expanding production and flood markets with its product. Except some unlikely alliance that would need private firms across the United States and Europe to agree to show faith in Russian oil producers and the Saudi government, oil producers are bracing for impact. What is extremely distinct from the price buoyancy five years ago, and what the Saudis and Russians surely could not have fully anticipated, is the demand disruption caused by novel coronavirus pandemic that has wreaked destruction on the mightest economies in the world.

The warning bells are ringing for labor markets because the last oil market meltdown pushed a series of policy shifts with “nationalization” of jobs in certain sectors, more flexible visas, new taxes and fees on the backs of foreign workers and a vast exodus of low wage workers in development. New nationalization policies across the GCC are meant to inspire and safeguard certain jobs for citizens. Oman blocked immigrants from working in more than 80 job categories. Saudi Arabia held employment to nationals in a number of retail and hospitality sectors, from mobile phone shops to eyeglass stores. The decline in government contracting, cyclical normality to GCC economies when oil revenues drop, was especially sharp between 2015 and 2018. Immigrant workers felt that pain as low wage construction workers found themselves stranded and unoccupied. As many as 700,000 foreign low wage workers were laid off in Saudi Arabia and went home to poor neighborhoods in the Middle East and South Asia unable to support their families.

For Gulf economies with an excessive number of immigrants to citizens, governments established taxes and fees that would turn foreigners into new sources of revenue, including the institution of road tolls, visa renewal fees, and excise taxes on alcohol, tobacco, and soft drinks. In all, the last downturn drove some diversification measures that did less to detach governments from oil revenue than to encourage governments to pull back on some generous social spending and ending the normalization of government subsidies of electricity and water as well as expected public sector jobs for citizens.

In the five years since 2015, foreign workers across the Gulf have been scrutinized by GCC authorities for their utility as consumers and sources of government revenue in taxes and fees. And governments have also seen where lower-skilled labor is a useful entry point for nationals in the workforce, especially in Saudi Arabia’s retail and service sectors. Those expatriates with purchase potential as real estate buyers or highly skilled experts have received some privileged residency status possibilities.

But this time, the strain will be more widespread across labor markets. There are a few reasons. First, governments around the world are seeking policy measures to reduce the burden on workers, as unemployment in the service sector and retail jobs swells. GCC authorities have little reason to give cash supplements to displaced workers, as most are foreigners. The hypothesis is that unemployed foreigners must return home, usually within a 30-day period of termination. Moreover, the legal obligations that firms and organizations have towards immigrants may be changing, in some cases making it more comfortable for businesses to lay off workers. The UAE enacted a new regulation on March 26 that allows employers to make workers unnecessary but must still provide housing (if provided contractually) and allow the employee to transfer his or her visa to a new employer if a new position is found. It also allows the employer to momentarily reduce salaries or force employees to take paid or unpaid annual leave. Saudi Arabia has announced partial salary support for citizens working in the private sector who are deemed excess, but no support for foreign residents.

Second, GCC governments are responding with stimulus packages that mainly provide liquidity to the banking sector and provide some minimal support to small and medium-sized businesses. As coronavirus cases rise across the region and the responsibility extends to health care systems, governments will need to make tough decisions about spreading care to all citizens and residents, as King Salman bin Abdulaziz Al Saud has pledged to do. But many private hospitals in Saudi Arabia are reliant on the government for payment from the General Organization for Social Insurance, Ministry of Health, or National Guard. They may see payments delayed as the government spreads perks across the population and struggles with a number of fiscal burdens. But these packages are unlikely to reduce the losses in the largest employers in the region — state-owned or state-related organizations from airlines to logistics and major contracting firms. These concerns will need significant recapitalization just to remain afloat and they will not survive with the same number of employees.

Third, people would love to travel back home. The social influence of COVID -19 spread on transnational labor will be overwhelming. The panic of repatriating isolated citizens as borders have shut and flights have been withdrawn over the last few weeks has created a new reality for global labor. From retail workers to senior executives, many emigrant workers are finding it unsettling to be restrained in a foreign country, without family support or friendliness with health care norms. The end of the school term and the beginning of Ramadan will definitely prompt departures of expatriates from the Gulf.

The economies of the GCC states will undergo major shifts from the twin COVID-19 and oil crises, as will the global economy. The communities of the GCC states, however, may be the most changed in terms of their demographic structure and dependence on foreign labor. This could be a moment for the correction of dependence on foreign workers. It could also be a moment in which standards of living are drastically downshifted as a vibrant consumer base is weakened by expatriate exits.