Saudi Arabia as a state system is currently moving forward in the context of the economic aspect of its existence, being on an upward trajectory and paying a high level of attention to domestic investments.
At the same time, Riyadh is gradually tightening the requirements for foreigners who come to the kingdom to take capital elsewhere. The implementation of the appropriate approach by the Saudi Arabian authorities concerning financial injections carried out outside the country indicates a significant focus on domestic development as a platform for economic growth. In this case, what can be described as a paradigm of commitment to internal incentives of a positive dynamic of the economy is being implemented.
In August, official data was released, according to which the kingdom’s $925 billion sovereign wealth fund, the Public Investment Fund (PIF), recorded an increase in its assets. The corresponding figure increased by 29% in 2023 compared to the indicator of 2022. The total value of assets last year reached 2.87 trillion Saudi riyals ($765.2 billion). In this case, domestic investments became the main factor of the upward dynamic.
In 2023, the mentioned fund’s financial injections in the implementation of projects related to the development of internal infrastructure increased by 15% year-on-year. In monetary terms, the corresponding figure reached 233 billion riyals. The volume of foreign financial injections of the fund last year amounted to 586 billion riyals. This figure increased by 14% compared to the amount of investments directed outside Saudi Arabia, which was recorded in 2022.
The kingdom’s authorities are making efforts to facilitate and accelerate investment flows to Saudi Arabia. The local government has adopted laws and reforms with appropriate content. In this case, the main goal is precisely to facilitate the easing of investments. Also, the government of Saudi Arabia, in a certain sense, mandates financial injections into the country. Currently, the kingdom’s leadership is building out its Vision 2030 plan. The relevant development program is aimed at diversifying the Saudi Arabian economic system, which relies heavily on the oil sector. Successful implementation of the relevant intentions will form additional incentives for development. Revenues from the mineral extraction sector in combination with other, including more innovative segments of the economy, can generate a massive positive result in the form of what can be described as large-scale enrichment.
Tarik Solomon, chairman of emeritus at the American Chamber of Commerce in Saudi Arabia, said during a conversation with media representatives that the data contained in the PIF report is evidence that, within the framework of the economic development paradigm, Riyadh is shifting from externally driven investments to increased attention to internal opportunities. According to the expert, the times when the kingdom had the status of a mere financial reservoir are coming to an end.
Tarik Solomon also stated that the success of PIF depends on partnerships based on mutual trust and a long-term vision when stakeholders are expected to make a meaningful contribution with capital, and not just strive for profit.
One example of the kingdom’s efforts to encourage investment in Saudi Arabia is the Headquarters Act, which came into force on January 1, the current year. In this case, there is a requirement that foreign companies operating in the Persian Gulf countries must locate their headquarters in the Middle East in Riyadh. The corresponding condition is mandatory for the mentioned companies to conclude contracts with the government of Saudi Arabia.
The updated law of the kingdom on investments is also a measure aimed at stimulating financial flows coming from outside. In this case, the goal is to increase the volume of foreign investment. In the context of this aspiration, Saudi Arabia intends to achieve a very ambitious result, which is that by 2030 the annual inflow of direct financial injections from other countries will reach the $100 billion mark. Currently, the corresponding figure is about $12 billion, which is a significant financial distance from the specified goal. This information was released by the Ministry of Investments of Saudi Arabia. The mark of approximately $12 billion in annual foreign direct financial injections has been reached since the launch of Vision 2030 was announced in 2017.
It is worth noting that some experts and analysts, through the prism of skepticism, perceive the realism that Riyadh will be able to achieve its goal of an annual inflow of investments from outside for $100 billion by the end of the current decade. The current financial volume of the corresponding indicator does not contribute to optimism about the likelihood of the Saudi Arabian plan materializing. At the same time, it is possible that the Kingdom’s efforts to raise foreign investment will generate significant results and make its plan an objective economic reality.
A financier based in the Gulf, who used the right of anonymity, during a conversation with media representatives stated the need for a new law on investments in Saudi Arabia. According to the expert, the relevant initiative will contribute to an increase in the volume of foreign financing. At the same time, an anonymous interlocutor of the media representatives stated that it is currently unknown whether the mentioned law will become an effective incentive for a significant increase in the required amount of capital.
Tarik Solomon agrees with the mentioned point of view. In this context, the expert also stated that the increase in spending on large projects provides for the need to grow break-even oil prices for the Saudi Arabian budget. Moreover, Tarik Solomon noted that it is unknown whether PIF’s domestic investments will deliver the expected return. The expert also mentioned the regional specifics characteristic of the Middle East. In this case, the implication is that there is a problem with stability in this part of the world. Recently, the specified component element of regional specificity has worsened against the background of the Hamas attack on Israel in October 2023. Currently, many international observers are talking about the high risk of a large-scale military conflict in the Middle East. It is also worth noting separately that the budgets of the countries of this region largely depend on oil price indicators, which are characterized by long periods of downturn. At the same time, it is important that the increase in geopolitical tension is very often the reason for the rise in the price of the mentioned mineral. There is a corresponding situation at present. However, this factor of impact on oil prices can be described as seasonal. At the same time, the current geopolitical tensions may turn out to be long-lasting and gradually transform into what can be called a permanent state of affairs in the international area within the present historical period.
James Swanston, Middle East and North Africa economist at Capital Economics says that the new investment law will improve the business environment in Saudi Arabia in terms of raising funds from abroad.
It is worth noting that investors have repeatedly expressed complaints about the rules in force in the space of the kingdom’s economic system. In this case, the main claim is related to the fact that special rules limit the opportunities for foreigners to participate more actively in the Saudi Arabian economy. The local government claims that the mentioned law, among other things, will unify the rights and duties of investors from other countries with the rights and duties of citizens, introduce a simplified registration process to replace licensing requirements and ease the judicial process.
James Swanston says that the so-called wasta (loosely translated as who you know) has been a major deterrent to foreign companies establishing themselves in Saudi Arabia. Moreover, the expert noted that the increase in the scale of foreign participation should also ease the burden that has been placed on the PIF to compensate for the drop in overseas financial flows.
It is worth noting that Riyadh’s increased attention to accelerating and expanding investment activity in Saudi Arabia is still not what can be called a fundamentally new shift of a fundamental nature. In this case, there is actually a tendency to scale an already realizing process, which is not an unknown territory for the kingdom.
Many foreign companies have long perceived the Gulf as a source of so-called dumb money. The corresponding concept is used to characterize investors who conclude deals relying on instincts or flair. In this case, a thorough analytical analysis of the specifics of the economic environment and market conditions is not carried out. Also, the mentioned investors do not receive data about the spaces with which they intend to interact.
At the same time, some investment managers from the Gulf countries say that investments from this region have become more sophisticated. Currently, as part of the decision on financial injections, thorough checks are carried out and more selective approaches are used than in other states. The corresponding change in practice indicates that the stereotype of sheiks who became rich as a result of oil sales and are ready to provide investments to almost all companies and entrepreneurs is gradually collapsing. This stereotype also implies that the sheiks do not need substantial justification for the prospects of the project to decide on financial injections.
Marc Nassim, partner and managing director at Dubai-based investment bank Awad Capital, confirmed in 2023 during a conversation with media representatives that a more thorough approach to investment activities has been formed in Saudi Arabia. In this context, it is noted that in previous years, a kind of procedure for receiving money from sheiks was simpler.
It can be assumed that the change in Riyadh’s approach to investment activities is to some extent due to such a factor as the experience of involvement in the relevant sector of the use of financial resources. Probably, the initial euphoria of the so-called oil money has remained in the past, giving way to such a priority as interaction with promising projects that have goals justified by objective factors and understandable reasons.
Recently, the number of companies that can receive money from investors from Saudi Arabia has decreased. This indicates that Riyadh is focused on the growth of its economic strength, and not on active investment, regardless of the goals and prospects of the projects for which financial injections are being made.
A financier based in the Gulf, who spoke to media representatives on condition of anonymity, said that in the past, Saudi Arabia’s priorities were not clear to foreign investors, but the situation has already changed. In this context, the interlocutor of the journalists noted that over the past few years, the PIF has been focused on raising financial injections into the kingdom. A financier also stated that it took time for bankers to assess the scale of this pivot. The current efforts of Riyadh are aimed at transforming the economic system.
As we have reported earlier, MENAP-Based Fintech ABHI Expands to Saudi Arabia.
