Foreign investment in Saudi at 14-year low despite reforms

New foreign direct investment in Saudi Arabia has plunged to a 14-year low, figures released this week by a United Nations body show, a blow to ambitious economic reforms which aim to increase inflows of foreign capital sharply.

FDI inflows shrank to $1.4bn in 2017 from $7.5bn in 2016, according to figures from the United Nations Conference on Trade and Development, which are in line with data published in recent weeks by the Saudi central bank.

The drop contrasts with the trend in other Gulf Arab oil exporting economies. FDI in the United Arab Emirates, the second biggest Arab economy after Saudi Arabia, rose to $10.4bn last year from $9.6bn, UNCTAD said.

FDI also increased in Qatar, which was hit last year by an embargo imposed by Saudi Arabia and other countries. Even Oman, an economy a tenth the size of Saudi Arabia, attracted $1.9bn, up from $1.7bn.

Saudi reforms launched two years ago aim to boost FDI to $18.7bn by 2020, in order to create jobs — unemployment among Saudi citizens is nearly 13 per cent — and help diversify the economy beyond oil exports.

Economists blame weak foreign investment mainly on the slump of oil prices since 2014. This hurt all the Gulf economies but Saudi Arabia, with a much larger population to support and a far bigger state budget deficit, was forced into more drastic austerity policies than its neighbours.

The austerity stifled growth in the Saudi private sector, outweighing the positive impact of reforms to attract investment such as new corporate and bankruptcy laws and a drive to cut red tape, which slashed the time taken to register new firms.

“The poor economy has made foreigners wary of putting in money, despite the economic reforms that are underway,” said Jason Tuvey, Middle East economist at Capital Economics in London.

FDI may start to recover as soon as next year if the economy strengthens, and as the government moves ahead with a privatisation programme that has been slowed by bureaucracy and legal uncertainties.

Authorities could attract tens of billions of dollars of FDI in coming years by selling state assets and involving foreign companies in public-private partnerships to build and operate infrastructure.

Additional tens of billions are expected to come from foreign portfolio investment as Saudi Arabia’s stock market joins global equity indexes, and if Riyadh goes ahead with selling 5 per cent of oil giant Saudi Aramco.

Tuvey said, however, that a big jump of FDI was unlikely since oil prices would for the foreseeable future remain the biggest single factor determining the health of the Saudi economy.

“Unless we see a further rise in oil prices, FDI will remain relatively low,” he said.