Foreign Investment Into Saudi Arabia Falls Back To Earth

Attendees on the opening day of the Future Investment Initiative (FII) conference in Riyadh, Saudi … [+] Arabia, on Tuesday, Oct. 26, 2021. Photo: Tasneem Alsultan/Bloomberg

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Inward investment into Saudi Arabia has fallen back down to earth after hitting a new high earlier in the year.

The latest figures from the Saudi Central Bank (Sama), released this week, show inward foreign direct investment (FDI) into the country was $1.75 billion in the third quarter of 2021. That was a sharp fall from the record figure of $13.8 billion in the April-June quarter, which had been boosted by a deal for the pipeline network of energy giant Saudi Aramco.

The most recent figure is in line with the country’s performance in the latter part of 2020 and early 2021, and underlines the continuing difficulty the government is having in attracting significant levels of inward investment – a necessity if Crown Prince Mohammed Bin Salman’s plan to restructure the economy is to succeed.

Inward FDI levels into Saudi Arabia collapsed in 2017 and while some of the lost ground has been made up since then, it is nowhere near the level needed to make a success of major projects such as the $500 billion futuristic city of Neom.

When the crown prince launched his Vision 2030 economic strategy in 2016, the aim was for FDI to reach around $19 billion by 2020, but in fact it was just $5.4 billion that year.

Efforts to attract inward investment have been hampered by the clampdown on senior business executives and other figures in 2017 – billed by the authorities as an anti-corruption drive. The brutal murder of journalist Jamal Khashoggi in the Saudi consulate in Istanbul the following year made international companies even more wary of being seen to support the Riyadh regime. The Covid-19 pandemic has only added to the problems over the past two years.

Despite all this, the government seems undeterred and, in October 2021, it set a new target of $100 billion in FDI a year by 2030, although there is plenty of scepticism about how realistic that target is.

The government has adopted a carrot and stick approach to bringing more international money into the economy. As well as offering the sort of low-tax environment that is usual in the region, the government has said that, from 2023, foreign companies must have their regional headquarters in the kingdom if they want to compete for government contracts.

State-led investment

In place of more foreign investors, the government has been turning to its own investment vehicles to support local projects and companies, in particular the Public Investment Fund (PIF). In December, the government said the sovereign wealth fund had invested around SR84 billion ($22.4 billion) in the local economy in 2021 and expected that to rise to SR150 billion in 2022. The size of the fund’s local portfolio is expected to reach SR3 trillion by 2030, compared to SR11 billion in 2016.

The government also wants local companies to do more. In March, it launched the Shareek programme, which aims to encourage large private sector firms to invest more in the economy between now and 2030, encouraged by tax breaks, soft loans and other support. State-owned enterprises such as Saudi Aramco are expected to play a significant role in this programme.

It remains to be seen how effective this strategy will be. In mid-December, London-based consultancy firm Capital Economics noted that, while the government was expecting to run a budget surplus in 2022 (the first since 2013), “the true fiscal stance is being muddied by an increasing reliance on PIF and other government entities to drive public investment.”

It added: “These government entities are increasingly being leant on to substitute for central government investment… We’ve raised concerns before that government-led investment in Saudi Arabia has generally been unproductive.”

View of Riyadh at night, Saudi Arabia