Saudi FDI increases, but leaves room for improvement

Saudi inward foreign direct investment reached its highest growth rate for the past decade in the first nine months of 2019, but its contribution remains significantly below the Vision 2030 goals.

Inward FDI grew 10 percent during the period, reaching $3.5 billion. This growth rate was reflected in a 54 percent increase in the number of foreign companies registering in the country. However, this remains below the Vision 2030 target for direct and indirect contribution to the economy by FDI, and further reforms are necessary for long-term goals to be met.

A salient reason for the rise in FDI is the government’s aggressive business climate reforms, reflected in a 30-position leap in the World Bank’s Ease of Doing Business (EDB) Index. Saudi Arabia earned a higher score because it set up a one-stop-shop for establishing a business; a new online platform for construction permits; streamlining the process of securing electricity supply; greater judicial transparency via an electronic portal for tracking cases; and several other significant reforms.

These microeconomic reforms also support the generally positive attributes of the Saudi macroeconomy. Despite the sharp decline in oil prices post-2014, currency reserves remain plentiful, the current account is positive, and public debt equals 20 percent of GDP, compared to around 60 percent in most OECD economies (and over 100 percent in the USA).

Moreover, along with the other Gulf monarchies, Saudi Arabia has earned a reputation for respecting the property rights of foreign investors, with the most prominent example being the non-coercive nationalization of Aramco. In contrast, both within the Middle East and elsewhere, bitter experience has made foreign investors wary of kleptocratic and predatory governments. Notably, while much controversy surrounded the extent of foreign participation in Aramco’s partial privatization at the end of 2019, at no point did investors question the security of their property rights.

Admittedly, global investors did raise their eyebrows over the unprecedented Ritz Carlton anti-corruption crackdown. But casual conversations with civil servants suggest that the key goal has been achieved: public sector employees are scared of deviating from the correct financial procedures.

An indirect indicator of the drive’s success is the government’s remarkable ability to implement deep reforms at breakneck speed. Reducing the powers of the religious police, allowing women to drive, and issuing a tourist visa are the sorts of policy that only a powerful and centralized government can introduce; in contrast, governments that suffer from widespread corruption would usually experience pushback when attempting deep reforms, as entrenched interests seek to keep the gravy train running.

But aggregate data also indicate that FDI continues to play a small role in the Saudi economy. In 2018, net inward FDI equaled 0.5 percent of Saudi GDP, compared to 1.2 percent for the MENA region, and 1.4 percent for the world. Since 2012, it has averaged 1 percent, confirming that this reflects a longer-term trend.

Saudi Arabia’s EDB profile provides some explanation. The Kingdom performs poorly in getting credit, trading across borders and resolving insolvency, where it is ranked 168th in the world.

The deeper reason for these lower scores, however, is that for most of the period since the 1970s, Saudi Arabia has paid comparatively little attention to its FDI policy. The energy sector, featuring global giants Aramco and SABIC, has always been the priority, with religious tourism earning the runner-up spot. The decades-long absence of a large-scale tourist visa indicates that attracting foreigners and making them feel that Saudi Arabia is worthy of their capital was not a central component of the economic strategy.

Vision 2030 seeks to reverse this trend, for several reasons. First, FDI directly contributes to the economy’s diversification, as it involves economic activity that is hopefully either weakly—or ideally negatively—associated with oil prices. Second, in many countries, FDI is a critical vehicle of knowledge transfer and human capital development, and Saudi Arabia is targeting both as it seeks to diminish its dependence on energy.

How can it achieve these goals? The speed of its increase in the EDB index confirms that an effective taskforce has been established. However, as with all key performance indicators, there is a pitfall that Saudi authorities must strive to avoid: fixating on the indicator at the expense of the underlying phenomenon.

According to Vision 2030, the goal is to attract FDI; getting a higher EDB score may contribute to that, and it may also assist the government in gauging its progress. However, the government has data on FDI, and it can measure knowledge transfer and the skills development of Saudis working in foreign firms within the Kingdom. Accordingly, the yardstick for success must ultimately be these latter indicators, and not the EDB index. Rather than asking the World Bank’s experts: How do we get a higher score? Saudi Arabia must ask foreign investors: How do we convince you to invest with us?

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Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.

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Last Update: Wednesday, 20 May 2020 KSA 09:57 - GMT 06:57
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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