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True cost of living a rising concern in Gulf

United Arab Emirates: Wednesday, December 12 - 2007 @ 17:11

Several recent studies have found that the cost of living is exceeding pay increases across the region, particularly in the UAE and Qatar.

A survey by GulfTalent.com showed that salaries in the UAE increased 10.7 per cent over the one-year period to August 2007, slightly higher than last year’s rise of 10.3 per cent. In Qatar, wages rose by 10.6 per cent compared with 11.1 per cent last year.

Meanwhile, inflation in the UAE stood at 9.3 per cent in 2006 and is forecast to reach 12 per cent in 2007, while Qatar’s inflation rate rose from 11.8 per cent in 2006 to 14.78 per cent in the first quarter of 2007.

The rising cost of living is having a direct impact on employees’ ability to save money. To illustrate, 41 per cent of UAE-based expatriates reported making no savings on their income, the highest figure in the Gulf.

Employees appear to be growing increasingly worried about their shrinking pocketbooks. A recent ‘consumer confidence’ survey by Bayt.com found that 70 per cent of respondents in Lebanon believe their salary had not kept pace with the cost of living, compared to 66 per cent in the UAE, 65 per cent in Jordan and 61 per cent in Saudi Arabia.

The survey also revealed that residents in Lebanon, Jordan, Saudi, and the UAE were among the most pessimistic in appraising their current financial situation relative to that of last year, with 31 per cent, 27 per cent, 27 per cent and 24 per cent of respondents indicating their situation was worse than it was last year.

Soaring rents

The high cost of living has been driven mostly by skyrocketing rents, which are swallowing a large chunk of income among Gulf residents, the vast majority of whom are renters.

Oman, Qatar, and the UAE have experienced the largest rent hikes, with 42 per cent, 32 per cent, and 23 per cent of tenants experiencing increases of 20 per cent or more, according to the Bayt.com survey. Not surprisingly, half of the respondents in Qatar and the UAE reported paying more than 30 per cent of their salary in rent, while eight per cent and six per cent of respondents in the respective countries said they pay over 60 per cent of their salaries in rent.

Many Gulf employers provide housing allowances for their workers, but increases in those payments often have not kept pace with rising rents. In Oman, salaries registered the biggest jump in the GCC, from 5.6 per cent last year to 11 per cent in 2007, but rents in the country have increased by 29 per cent over the last year, the GulfTalent.com report found.

While inflationary costs are altering the dynamic for everyone, those with families who have to contribute to their housing, transport, and schooling needs are feeling the impact most, said Tom O’Byrne, a principal at Mercer, a global human resources firm. This is also affecting employers that cover housing, transport, and schooling needs. However, there is no evidence that employers are trending towards hiring single employers with no dependents to save on costs, he added.

Salaries not keeping pace

Experts say salary rises generally are not on par with the rising cost of living in the region. ‘Employees who are in an existing job are not seeing their total remuneration keeping pace with inflation via salary rises from their employer,’ O’Byrne said. However, large numbers of skilled expats are increasingly able to seek and secure higher salary packages (and thus keep ahead of inflation) by moving jobs and employers.

The movement between jobs and companies, which O’Byrne refers to as the ‘talent churn,’ creates its own spiral because employers need to replace those employees who have left. In turn, this has the net effect of driving up salary and recruitment expenses, which helps to feed inflation.

In lieu of offering higher base salaries, an increasing number of employers are offering short and long-term incentive programs, including performance bonuses and share plans for managers and key employee levels, he noted. Companies are also offering leadership development programs, international assignments, and extra leave.

Talent shortage

The good news for employees in the region is that the trend of pay rises, while in some cases modest, is likely to continue, due to the region’s strong economy and the growing demand for talent.

The region is facing a talent shortage in part because of increasing competition with the emerging economies of Russia, India, and China, said Ayman Haddad, managing partner of the Mena region for Heidrick & Struggles, a global search firm. ‘In particular, India has done a good job of bringing its diaspora back with a booming economy that offers better salaries and career opportunities,’ he noted.

Since India has traditionally been one of the main suppliers of expatriates to the Middle East, it has restricted the labour pool in the region.

Another reason for the talent shortage is that companies with a presence in the Gulf want to grow their businesses regionally, and this is driving up the demand for qualified talent with experience in the region, O’Byrne said. Another key factor is the easing of laws regarding expatriates changing jobs.

In terms of job sectors, the talent crunch is biggest in construction, oil and gas, banking, and IT. There is also a huge demand for executive talent, noted Haddad. An increasing number of Gulf companies are saying talent shortages are limiting their ability to expand, forcing them to turn down new business or, in some cases, causing them to miss targets on their existing projects.

Still attractive

Despite the rising cost of living, the Gulf region still holds a very strong appeal for professionals as it offers a modern, cosmopolitan environment and opportunity to participate in some of the world’ largest and most exciting projects, said Bayt.com.

O’Byrne points out that the tax-free environment in the Gulf means take-home pay in the region is proportionally higher than the rest of Europe. According to Mercer’s global cost of living survey of 143 cities, Dubai is listed at 34, which means it is still relatively competitive, he noted.

Also, opportunities for long-term growth are seen as more important than short-term pay considerations, said Haddad. ‘One of the reasons that the Middle East is becoming more attractive is it is seen as a good career move. Gaining Gulf experience is now seen as a good stepping stone, which was not the case in the 90s,’ he noted.

Still, inflation in the Gulf has made it a less feasible destination for some compared to a decade ago. Would depegging the Gulf currencies help reduce inflation in the region? ‘Dropping the dollar peg should fortify currencies of the stronger Gulf economies such as the UAE and dampen inflationary pressures somewhat,’ said Bayt.com.

Kuwait chose to drop the dollar peg earlier this year and subsequently saw its currency appreciate 3%, thus increasing the competitiveness of Kuwaiti salaries relative to its neighbours. Other GCC countries may soon be forced to follow suit.

On the other hand, Haddad said it is difficult to judge the impact that depegging the dollar might have on the GCC economy. ‘There are so many factors to consider. I’m not sure anyone can predict the impact that it would have,’ he noted, adding that each expats’ case is different. ‘The impact that dropping the peg would have on an expat’s ability to save would depend on the currency of the expat’s home country,’ he pointed out.

See also:
Rents eat into regional paychecks
UAE salaries rise by 10.7 per cent

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Wednesday, December 12- 2007 @ 17:11 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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