Riyadh – Decypha: Once one of the more economically stable countries in the region, Saudi Arabia has been looking into several reform measures to counter the effect of the oil price slump. One of the directions the state is shifting towards is foreign investments, not only to improve its deficit, but to meet the world’s growing demand of advanced industries.
Saudi Arabia’s Foreign Direct Investments (FDI) is an essential drive in the country’s economy as it has contributed by 68.6% to the overall GDP resulting from merchandise trade according to a report by Oxford Business Group (OGB). Despite the important role FDI poses to the country, the International Monetary Fund (IMF) has stated that the growth estimate for the country’s economy has declined by 1.6% in 2016 compared to 3.5% forecasted in the previous year.
FDI Influx and Sector Performance
In the fourth quarter of 2016 alone, Saudi Arabia secured an FDI inflow of $2 billion, up from a $1.71 billion the previous quarter, based on estimates by Trading Economies. The year however, recorded a total of $7.3 billion a decline from 2015’s FDI influx of $8 billion.
However, the kingdom is currently among the top three countries recording the highest FDI in western Asia following UAE and Turkey according to a report released by Nordea.
The country has had Investment Promotion & Protection Agreements with several countries such as China, France, Germany, Austria, Italy, Malaysia, and Taiwan; it also owns cooperation in a variety of agreements with 36 countries, including a secured private investment agreement, with its crucial ally, the United States since 1975.
The country seeks to develop its economic input and output levels beyond the oil sector; King Salman bin Abdulaziz has recently spent a month in Asia in efforts to diversify economy as he signed agreements with China, Japan, Malaysia, and Indonesia worth of multi-billion dollars. The country seeks to increase its FDI to 5.8% from its overall GDP by year 2030.
This anticipated growth is expected to result from Small-Medium Enterprises (SMEs) which are expected to contribute by 20% to 30% to GDP in 2030 and private-public partnerships, according to OGB.
Saudi Arabia doesn’t seek to invest foreign revenues into banks with a 2% interest; however seeks to turn one industry or sector into 10 or 12 other sectors to enhance economic output according to Tom McNulty Director specializing in the energy sector at Navigant Consulting mentioned in a report by CNBC.
Foreign countries investing the oil sector recording FDI inflow make up 8.6% of the chemical and oil industry, 2.8% of refined oil products, and 2.4% of the mining oil and gas according to a report released by Santandertrade. The foreign countries investing in Saudi’s oil sector include USA, France, China, Germany, Japan, the Netherlands, and Kuwait.
The country plans to increase its annual FDI inflows within the upcoming ten years through focusing investments in new sectors such as healthcare, information technology, and mining according to Khaleej Times. This comes as part of a plan issued by Abdullatif Al Othman governor of Saudi Arabian General Investment Authority (SAGIA) in efforts to prevail in an era of cheap oil.
Saudi Arabia is also currently focusing the retail sector to prevail larger foreign investments. The state has implemented policies that will turn the country into an international hub for selling and re-exporting products, and distributing, according to Arab News. A recent initiative launched called ‘100 percent ownership’ that grants foreign companies full ownership has been approved by cabinet in efforts to attract investors in wholesale and retail sector. Before this initiative/ regulation, foreigners were allowed only 75% investment limit of foreign activities in Saudi Arbia.
Top foreign retailers entered the market in the late 2000s, where Saudi Arabia has been recently labeled a leading global retail market in A.T. Kearney’s 2016 Global Retail Development Index (GRDI). Saudi Arabia ranked 8th on the global scale in regards to the retail sector.
Public-Private partnerships anticipate further growth and opportunities in other sectors such as utilities, airports, healthcare, and real estate according to SaleemKhokhar head of Fund Management at the National Bank of Dubai who said in a report to CNBC.
The country is encouraged to enhance the entertainment sector through establishing an independent authority for entertainment that will handle foreign projects in the sector.
Countries Investing in Saudi Arabia
Saudi Arabia seeks to increase foreign investments through the capital markets reforms that will be enforced in 2017 which will allow Qualified Foreign Investors (QFIs) to access a larger variety of capital market products. The government has recently decreased the minimum input of QFIs from $ 5 billion to $ 1 billion in efforts to attract foreign investors. These regulations will also be beneficial once applied on the privatization of many state-owned enterprises such as Saudi’s Aramco. The country announced in 2016 that up to 5% of Aramco’s value could be offered which will inevitably generate $ 150 billion worth of FDI to the country.
China is among one of the countries investing in Saudi Arabia with deals worth of $ 65 billion in the manufacturing and electronic industry, as well as Japan who assigned its Toyota Motor Corp to conduct feasibility studies on making vehicles in Saudi Arabia, according toReuters.
Saudi-Based Armco is partnering with Malaysia’s oil company Petronas to build refining and petrochemical plants in China, emphasizing the role of Saudi Arabia as Asia’s major oil supplier.
The country is also launching deals with China and Japan in various fields, whereas Saudi Basic Industries which is a petrochemical giant is overlooking joint opportunities with Chinese-based Sinopec.
The country remains a strategic partner to the United States with potential partnerships in the pipeline worth of $ 200 billion that was discussed recently. Both countries have signed Trade and Investment Framework Agreement since 2003 according to a report by the U.S Department of State.
The country’s launch of the ‘100 percent ownership’ is considered means to facilitate investment opportunities to foreigners and increase FDI. These licenses allow foreign companies to solely invest in the country in retailing and wholesaling without a Saudi partner, thus granting investors full ownership.
Companies who are qualifies for the license tend to invest over $ 53.3million over five years in parallel to setting goals for manufacturing, research, development, and logistics. The license will diversify economy and launch new sectors in the market through privatizing public services and assets to allow new investment for both Saudi and American companies.
Saudi Arabia has taken new measures earlier in 2017 to attract foreign investors by granting them business visas within a 24-hours period. The new law is targeted for foreign business delegations who can now acquire their visas easily electronically according to Arabia Business.
Market Trends
Several sectors are open for foreign investors in Saudi Arabia as part of the current market trends tracked down in a report released by Business Consultancy Proven. The mining industry is one f the prosperous industries in the country which holds several mineral and metal resources. The country has catered developments of Ras Al Khair Industrial City that is comprised of natural resources according to Zaid Al Mashari CEO of Proven.
The mining industry is the third thriving factor to Saudi economy following petrochemicals and petroleum industries. Ras Al Khair City will double its current output of natural resources to add up to $ 26 billion to GDP by 2020.
Real estate is another promising sector where South Korea is developing 100,000 residential units in north Riyadh within ten years. Other foreign companies from UK, China, and France were offered tenders to build affordable homes, according to Proven. The Information Technology sector is another industry that yields foreign investments where the Cisco and Microsoft signed agreements with Saudi Arabia to develop the country’s digital infrastructure.
The logistics sector could also drive in foreign investments, whereas the country is known to be the logistic hub of the Gulf. Saudi Arabia make up 43% of the logistic market in the region the comprises of six GCC countries.
Investment Climate Challenges
FDI has declined for seven years until 2015 according to OGB and the decline in oil prices has contributed to erasing a stable trade surplus. Challenges in the market were a result of low consumer demand in non-oil sectors. Foreign firms may not be attracted to Saudi Arabia by only the launch of joint ventures, as they currently face obstacles of new taxes and policies that made hiring foreign workers more expensive.
Other challenges are presented in few women that are allowed in the workforce, access to credit, requirements to hire locals, and lack of skills among the local workforce. All these factors make foreign investors reluctant from entering the Saudi market. Despite the challenges, the two-year oil revenues decline is currently alarming the country to take more open measures and change in policies.
Saudi Arabia has long benefited from oil prices and production that drove up GDP; however the decline in oil prices that began in 2014 has lowered export revenues and was declared one of the reasons to encourage the country to plan the newly anticipated 2030 development program. Moving towards that vision requires relying on other sectors not only for boost in revenues but also applying advanced activities and achieve an open market framework where foreign investments and private sectors can have a leading role in economic enhancement.
By Fatma Khaled
