Saudi Arabia’s big push to attract investment

Cast your mind back four years. Donald Trump was yet to formally launch his presidential campaign. The ink on the Iran nuclear deal was still drying, and oil had just plunged to $26 a barrel.

Against this background, in a rare press conference, Saudi Arabia’s Crown Prince, Mohammed bin Salman bin Abdulaziz unveiled Vision 2030, an ambitious plan to end the kingdom’s “addiction” to oil, and transform it into a global investment power.

The promise of an Aramco IPO grabbed most headlines, but equally important were the hundreds of reforms designed to boost foreign direct investment (FDI) to 5.7 per cent of GDP by 2030.

A few months later, the International Monetary Fund (IMF) “welcomed the [Saudi] authorities’ timely response” to the decline in oil prices, and supported their plan to increase the role of the private sector in the economy by focusing on privatisation and public-private partnerships, improve the business environment, develop local capital markets, encourage FDI, and support small and medium enterprises.”

Since the unveiling of Vision 2030, the speed and scope of change in Saudi Arabia has been extraordinary. The combination of economic and social reforms have led to cinemas opening, women driving and K-pop stars performing in packed venues. The Crown Prince has announced several seaside giga-projects, opened up the kingdom’s tourism sector with an easy e-visa, and invited the world’s best sportsmen and women to compete in events as varied as golf, women’s wrestling and Formula E racing.

The question remains whether all this fanfare translates into foreign investment. The official figures certainly seem to indicate that they do.

Foreign direct investment into the kingdom doubled in 2018, and grew more than 10 per cent year-on-year in the first nine months of 2019, to an estimated $4.6bn. A total of 1,131 foreign companies were created in 2019, 54 per cent more than in 2018.

Ibrahim Al-Omar, former governor of the Saudi Arabian General Investment Authority (SAGIA), which is responsible for issuing foreign investment licences, says this is “the biggest increase the kingdom has seen over the past decade.”

“To have these results in just four years is impressive,” explains Walid Namane, an analyst for Emerging Markets Intelligence & Research (EMIR).

“Vision 2030 is a long-term strategy. You have to give the government credit, it is not easy to do radical change in four years.”

This positive picture comes against an international economic picture that has been far from rosy. Over the last couple of years, the US and China started a trade war, the oil suppliers group OPEC+ agreed on production cuts, demand for oil fell, and in 2019, global foreign investment remained flat.

According to the Institute of International Finance (IIF), the kingdom’s GDP will see 2.2 per cent growth in 2020. “Saudi non-oil activity and the increasing private activity are behind this. Non-oil GDP is picking up to 2.7 per cent between 2020 and 2022. Private sector activity is growing at a five-year high,” says Namane.

Historically, Saudi has never been the easiest place to do business, but in 2019, the World Bank rated the kingdom as the world’s top reformer and improver in its Doing Business report, and the World Economic Forum ranked Saudi Arabia among the top 40 economies in its Global Competitiveness Report.

So what has changed?
Ibrahim Al-Omar says the government has implemented 57 per cent of 400 planned reforms, and introduced a new procurement law, improved legal infrastructure, a new insolvency law, a commercial arbitration centre, new residency permits and faster business registration procedures.

“Saudi Arabia now allows 100 per cent foreign ownership, in areas as diverse as retail, real estate, healthcare, education, courier services, and publishing. SAGIA has launched a specialised entrepreneur licence, which allows international entrepreneurs to launch a fully foreign-owned start-up company in Saudi Arabia in a matter of hours.”

He underscores the case for investing in the kingdom; “Saudi Arabia is the seventh largest stock market globally. We are a growing economy and when it comes to our resources, our people are the most important assets. Up to 58 per cent of our population is below the age of 30.”

These Saudi millennials also boast an impressive GDP per capita of around $50,000 at purchasing power parity, comparable to the US at $54,000. They might enjoy the new freedoms and festivals, but they need jobs. Unemployment declined to 12 per cent in Q3-2019 for a fifth consecutive quarter, but the private sector is going to need to grow quickly to create enough positions, particularly since women are now joining the workforce in droves.

Saudisation is an understandable policy in a country with high youth unemployment, but it is not popular among multinationals and SME’s looking to get a foothold in the kingdom.

At the beginning of 2019, the Ministry of Labour and Social Development started implementing Saudisation in five key sectors – building and construction material shops, medical appliances and equipment shops, car spare parts shops, shops selling carpets and confectionary shops and patisseries. Saudisation of the pharmacy sector is set to begin in July 2020, and eventually all hospitality jobs will have to go to locals.

The introduction of vocational tests for workers from seven countries is also likely to cause complications for companies looking to recruit abroad. Employment visas will only be approved after applicants have taken skills exams in their home countries.

These two policies have the potential to discomfort foreign investors, but not to deter them. As Walid Namane from EMIR explains, “Saudi represents a massive market opportunity”.

Meanwhile the kingdom is accelerating the pace of investment. The long-awaited Aramco IPO raised $25.6bn, swelling the coffers of the Public Investment Fund (PIF), and silencing the critics who suggested it was over-valued.

Massive sums are promised for the development of giga-projects like NEOM, the Renewable Energy Project and Amaala Project on the Red Sea. Dozens of multinationals have already signed MOU’s to build malls, homes and hotels.

Ibrahim Al-Omar says he feels proud: “Saudi Arabia has come so far in such a short space of time. That’s not to say that all the hard work is done. But we are ambitious and have big plans for the future. We’ll continue to showcase to investors the possibilities that all of these economic reforms are creating. We want to open Saudi to the world and we are not letting up.”