January 1st was implementation day for the 5% VAT in Saudi Arabia and the UAE, with the rest of the Gulf Cooperation Council (GCC) to follow in H2 2018 and 2019. The move is part of a wider reform program that aims to diversify government revenues amid the relatively low oil price environment. MENA executives are expressing concern of the impact of the VAT alongside rising utilities costs, government fees and limited wage growth on the business environment, and are preparing for margins to be squeezed and consumption to ease in 2018. However, there is another less obvious impact that executives should take into consideration in their regional strategic planning. The economies of some MENA markets are dependent on the GCC in several ways. Lebanon, Jordan, and Egypt all have a form of reliance on the GCC in terms of investments, tourism and – particularly relevant now – remittance inflows.
Remittances are significant for MENA markets:
Remittances are an important driver of Lebanon, Jordan, and Egypt’s economies; between 2010 and 2016, remittances as a percent of GDP were 15.4%, 11.3%, and 5%, respectively. For Lebanon, 60% of total remittances come from the Gulf, while in Jordan the percentage is higher at 70%. For Egypt, 47% of expats reside in the Gulf, totaling around 4.4 million, with 2.9 million in Saudi Arabia alone. The importance of remittances also increased in the last few years. The economies in Egypt, Jordan and Lebanon all struggled from political and economic instability, so the reliance of many families on external income increased, while domestic employment and wage growth dampened.
Expats face numerous challenges in the GCC:
Over the last few years, numerous factors have dampened the outlook for Lebanese, Jordanian, and Egyptian expats in the GCC. Investment growth slowed down in the GCC due to the oil price crash, as well as the dampened MNC sentiment towards the MEA region, which reduced the pace of growth in regional management hubs in the UAE. Demand for expatriate labor at all skill levels dampened. Furthermore, hikes in utilities and fuel costs, introduction of expat and expat dependent fees, increases to government services fees and the VAT have caused an increase in living costs for expats in the GCC, potentially limiting the amount of remittances they send home. Remittance inflows were already stagnating from years of low oil prices that has slowed growth in the GCC, but these recent government reform measures will put even more pressure on living costs for expats and the remittances they send home.
Impact on Lebanon, Jordan, and Egypt:
Considering the recent developments, remittance inflows from the Gulf to these countries are likely to slow down in 2018. While an explicit impact on these markets’ GDP will be difficult to ascertain, research does show that there is a positive correlation between remittance inflows and private consumption, especially for Lebanon. Combined with the potential risk of political tensions causing GCC governments to refrain their citizens from visiting Lebanon, the Lebanese economy will remain significantly dependent on GCC developments.
Egypt may be able to compensate for the slowdown in remittances from GCC with slight improvements in remittance flows from the United States and Europe, which are expected to experience strong growth in 2018.
Beyond direct remittance flows, an indirect impact of the GCC slowdown is that it creates downward pressure on wages in Egypt, Lebanon, and Jordan. As the outflow of labor from these countries has slowed down, and even some expats return to their home countries, they’ve been increasing the availability of experienced labor and putting pressure on wage growth.
Key takeaways for MENA executives:
The GCC is not the reliable source of remittances it once was. MENA markets are increasingly interconnected and this is a reality that executives must take into consideration in their regional strategic planning and market monitoring processes. Identifying and monitoring the correct leading indicators of demand – whether they are local or regional – are critical to setting accurate targets and getting ahead of disruptions to commercial performance.
For our latest updates and insights FSG clients can access the 2018 MENA Regional Outlook.