Imposed Expat Levy Forcing 2.5m to Leave Saudi Arabia

The oil-dependent Saudi Arabia economy has ground to a near standstill since crude prices collapsed in 2014. Little wonder that gloom in the property sector has reflected this broader slowdown in an economy that has yet to achieve significant diversification.

“Prices of assets, including real estate and stock market, have been affected since the oil price decline,” says Mazen al-Sudairi, head of research at Al Rajhi Capital, the investment banking arm of the kingdom’s largest Islamic bank, news outlets reported.

Major cities have seen valuations and lease rates fall across residential, commercial and retail properties.

These and other economic problems including the expat tax imposed by the Saudi authority, are forcing over two million expatriates to leave Saudi Arabia.

As Riyadh introduced the so-called expat tax, meaning foreign workers must pay $26 per dependent living in the kingdom with the tax set to rise rapidly in the coming years, 2.5 million of the country’s 10 million expatriates are expected to leave by the end of next year as foreigners’ tax-free lifestyle comes to an end.

With the decrease in oil prices, the main source of income for the six (Persian) Gulf Cooperation Council states (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman), they have been pushing for economic reforms and for new sources of income to help deal with deficits in budgets that are often largely dependent on the oil sector and that have reached unprecedented highs, Zawya reported.

New measures adopted by these Arab states included raising fuel prices, increasing service fees and reducing subsidies of basic supplies that are costing the states billions of dollars.

Saudi Arabia, with a total population of more than 31 million that is larger than that of the other five (P)GCC countries combined, was hit the hardest.

New regulations also loom over the market, such as the introduction in July of levies on expatriate workers and dependants that could encourage the departure of many.

“The new regulations on expats are affecting the outflow of foreigners, which means population will decline, affecting demand,” al-Sudairi said.

Tariq Al-Maeena, a columnist for the local English language daily Saudi Gazette, recently wrote that as many as 2.5 million expatriates could leave by the end of 2018 as the cost of living becomes intolerable for many of the country’s more than 10 million foreign workers and dependants.

The expat levies are initially set at 100 Saudi riyals ($26) a month per dependent. They will incrementally increase over the next three years and are predicted to generate around $700 million in government revenue in their first year.

  Estate Market Fragile

Research by consultancy JLL shows rents and sales prices of villas and apartments in the capital Riyadh have been falling by 3% on an annualized basis, continuing their slide since oil prices collapsed in 2014. In the Red Sea port of Jeddah, rates for new office rental deals struck in the second quarter were down by 9% year-on-year, the consultancy says. JLL expects further declines over the next year.

But the revenue-raising initiative threatens a property market that is already fragile. Maeena says the real estate market and rents in some areas could fall by as much as 50%, with “reverse migration” also hitting other economic sectors.

Yet Saudi Arabia suffers from a shortage of housing and analysts say the probable impact of the levies on the property sector has yet to be fully digested and accurately assessed.

  Fiscal Deficit

The system of levies that favors Saudi workers over foreigners is one of many radical reforms intended to bolster state finances and prepare nationals for a world beyond oil.

But Saudi Arabia’s attempts to reduce its fiscal deficit have weakened growth across an economy that is traditionally reliant on government spending. In particular, the squeeze threatens the government’s ability to deliver 1.5 million new units to Saudis on the government waiting list.

State spending within the infrastructure and transportation segment of the budget, which includes housing, was 12.4 billion Saudi riyals ($3.3 billion) in the first half of 2017, which was less than a quarter of the projected outlay for the year.

The housing ministry is aiming to tackle logjams in the system to ensure it delivers on its own target of facilitating the building of 120,000 new homes over the next three years, against a broader national target of 280,000 units.