This exodus of expat workers in 2020, due to the economic fallout from Covid-19 and oil price shock, had accelerated a shift in the region's labour market that we expect will continue through 2023.
These changes could have repercussions for the regional economy and pose additional challenges to diversifying away from its heavy reliance on the hydrocarbon sector in the long run, if not met with economic and social reforms that foster human capital, stated S&P in its "Expat Exodus Adds To Gulf Region's Economic Diversification Challenges."
"We expect the population will have declined by just over 4% on average last year across the six members of the GCC, mainly due to migrant outflows," said Zahabia Gupta, the lead credit analyst for the report.
"While some expats will return as the economic cycle recovers, we project the proportion of foreign workers in the region will decline, particularly in Kuwait and Oman. The overall GCC population is unlikely to return to the 2019 level of 57.6 million until 2023, owing to weaker economic conditions and labor nationalization policies," she added.
"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.
However, the GCC's high dependence on expat labour - 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, she added.
For 2020, S&P has estimated that the population across the GCC contracted by 4% on average, with the sharpest decline in Dubai, followed by Oman, Qatar, Abu Dhabi, and Kuwait. The majority of this drop is due to an outflow of foreign workers, it stated.
In Oman, the expat population took a hit of about 12% (close to 230,000 people) in 2020, with the contraction skewed toward lower-income South Asian workers employed in construction and agriculture.
According to the General Authority for Statistics, in Saudi Arabia close to 260,000 foreign workers lost employment during the third quarter of 2020. In Kuwait, local media reported that 110,000 expats left the country between March and June 2020.
"Our estimate of the population contraction in Dubai in 2020 is more pronounced than for other GCC countries, given the pandemic's significant negative impact on the key employment sectors of aviation, tourism, and retail, and our expectation of negative employment trends in Dubai's real estate sector," said the report.
According to S&P, 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, stated the report.
According to Gupta, 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," she added.