2024-08-23 06:01:16
Riyadh, Saudi Arabia.
Xavierarnau | E+ | Getty Images
Saudi Arabia is going all out to promote domestic investment, while also imposing higher requirements on foreigners who want to invest in the country.
Saudi Arabia’s $925 billion sovereign wealth fund will see assets rise 29% to 2.87 trillion Saudi riyals ($765.2 billion) by 2023, with local investment the main driver, according to its annual report released earlier this week.
The fund’s investments in domestic infrastructure and real estate development rose 15% year-on-year to 233 billion riyals, while its outbound investments rose 14% to 586 billion riyals. Meanwhile, the Saudi government has introduced laws and reforms to promote and even force investment in the kingdom, while developing its “Vision 2030” plan to diversify its oil-dependent economy.
Tarik Solomon, honorary chairman of the American Chamber of Commerce in Saudi Arabia, told CNBC: “The PIF report signals a shift in investment focus from external drivers to domestic opportunities. The days of viewing Saudi Arabia as a mere financial treasure trove are over.”
“Today, PIF’s success depends on a partnership based on mutual trust and a long-term perspective, where stakeholders are expected to make meaningful contributions with capital, rather than just pursuing profits.”
One example is Saudi Arabia’s headquarters law, which came into effect on January 1, 2024 and requires foreign companies operating in the Gulf region to locate their Middle East headquarters in Riyadh if they want to sign contracts with the Saudi government.
Saudi Arabia’s recently updated Investment Law is also designed to attract more foreign investment – and sets an ambitious target of attracting $100 billion in FDI per year by 2030.
Currently, this number has Average annual revenue: about US$12 billion Saudi Arabia’s economy has been languishing since Vision 2030 was announced in 2017, but it is still a long way from reaching that goal, according to the Saudi Ministry of Investment.
Some observers in the region have expressed doubts about whether the $100 billion figure is realistic.
“The new investment law is absolutely crucial to facilitate more foreign direct investment, but whether it will lead to a significant increase and amount of capital required remains to be seen,” a Gulf-based financier told CNBC, speaking on condition of anonymity due to professional constraints.
Solomon agreed, noting that increased spending on major projects would require higher break-even oil prices for the Saudi budget.
“It remains to be seen whether the Pacific Islands Fund’s domestic investments will deliver the expected returns, particularly in a region fraught with instability, with oil-dependent budgets and facing a prolonged period of low oil prices,” he said.
However, James Swanston, Middle East and North Africa economist at Capital Economics, wrote in a recent report that the new law will “improve the local business environment to attract overseas investment.”
Investors have long complained that vague and often ad hoc rules have prevented greater foreign participation in the Saudi economy. The Saudi government said the new law would align the rights and obligations of foreign investors with those of citizens, introduce a simplified registration process to replace licensing requirements and streamline judicial proceedings, among other things.
“We have long argued that so-called ‘wasta’ (roughly translated as ‘who you know’) has been a significant barrier to foreign companies setting up in Saudi Arabia,” Swanston wrote.
He added that spurring more foreign investment “should also ease the recent burden on the Public Investment Fund to offset weakening foreign capital inflows to Cambodia”.
No more “dumb money”
The shift toward greater scrutiny and domestic priorities is not new; on the contrary, its pace is accelerating every year.
While many overseas companies have long viewed the Gulf as a source of “dumb money,” some local investment managers say — referring to the stereotype of oil-rich sheikhdoms throwing money at anyone who wants it — investments coming out of the region have become more sophisticated, employing deeper due diligence and being more selective than in years past.
“Before, you could simply say, ‘I’m a fund manager in San Francisco, give me a few million,’ ” said Marc Nassim, partner and managing director at Awad Capital, an investment bank in Dubai. revealed to CNBC in 2023.
“I think very few of them will be able to get funding from the region – they are much more selective than before.”
The Gulf financier, who spoke on condition of anonymity, said if Saudi Arabia’s priorities were unclear to foreign investors before, they are now clear.
“The PIF has been working over the last few years to attract investment into Saudi Arabia,” he said. “It took a while for bankers to fully appreciate the scope and scale of this move. This is all about transforming the economy.”
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