Riyadh, Saudi Arabia.
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Saudi Arabia is moving full steam ahead with a focus on domestic investment, and with it, higher demands on foreigners who come to the country to source capital elsewhere.
An annual report released earlier this week showed assets of the Public Investment Fund, the country’s $925 billion sovereign wealth fund, grew 29% in 2023 to 2.87 trillion Saudi riyals ($765.2 billion) – And local investment is the main driver.
The fund’s investments in domestic infrastructure and real estate development increased 15% year-on-year to 233 billion riyals, while its overseas investments grew 14% to 586 billion riyals. Meanwhile, the Saudi Arabian government has developed its Vision 2030 plan to diversify its oil-reliant economy and introduced laws and reforms to promote and even mandate investment in the country.
Tarik Solomon, honorary president of the American Chamber of Commerce in Saudi Arabia, told CNBC: “The PIF report marks a shift from externally driven investment to a focus on domestic opportunities. The era of treating Saudi Arabia as a financial reservoir is over.”
“Today, the success of PIFs depends on partnerships based on mutual trust and long-term vision, where stakeholders make meaningful contributions to capital rather than just seeking profits.”
One example is the Kingdom of Saudi Arabia’s Headquarters Law, which came into effect on January 1, 2024, requiring foreign companies operating in the Gulf to locate their Middle East headquarters offices if they wish to enter into contracts with the Saudi Arabian government. Riyadh.
Saudi Arabia’s recently updated investment law also seeks to attract more foreign investment, setting itself an ambitious target of $100 billion in annual foreign direct investment by 2030.
Currently, this number has Average of approximately US$12 billion per year Since Vision 2030 was announced in 2017, there is still a long way to go to reach that goal, according to the Saudi Investment Ministry.
Some observers in the region are skeptical that the $100 billion figure is realistic.
One Gulf financier, who spoke on condition of anonymity due to professional restrictions, told CNBC: “The new investment law is absolutely critical to facilitate more foreign direct investment, but it remains to be seen whether it will lead to a significant increase in capital required and a significant increase in volume. .
Solomon echoed that sentiment, noting that increased spending on major projects will require higher oil prices for the Saudi budget’s breakeven.
“It remains to be seen whether the PIF’s domestic investments will deliver the expected returns, especially in a region rife with instability, with an oil-dependent budget and facing a prolonged period of low oil prices,” he said.
James Swanston, Middle East and North Africa economist at Capital Economics, wrote in a recent report that the new law will “improve local business conditions and attract overseas investment.”
Investors have long complained that vague and often ad hoc rules prevent them from participating more in the Saudi economy. The Saudi Arabian government said the new law will align the rights and obligations of foreign investors with those of citizens, introduce simplified registration procedures to replace license requirements, and simplify judicial procedures.
“We have long argued that so-called ‘wasta’ (roughly translated as ‘people you know’) have been a major obstacle to foreign companies establishing themselves in the Kingdom,” Swanston wrote.
Stimulating more foreign investment “should also ease the recent burden placed on the Public Investment Fund to offset weak foreign investment in Saudi Arabia,” he added.
No more “dumb money”
The shift to greater scrutiny and domestic priorities is nothing 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 the oil-rich emirate throwing cash at anyone who wants it – from the region Investments have become more complex, requiring deeper due diligence and being more selective than in years past.
“It used to be much easier to say, ‘I’m a fund manager from San Francisco, please give me a few million dollars,'” said Marc Nassim, partner and managing director at Awad Capital, a Dubai-based investment bank. . told CNBC in 2023.
“I think a very small number of them will be able to access funding from the region – they are more selective than they were before.”
The Gulf financier, who spoke on condition of anonymity, said that if Saudi Arabia’s priorities were unclear to foreign investors before, they are now clear.
“PIF has been focusing on investing in Saudi Arabia over the past few years,” he said. “It took a while for bankers to fully appreciate the scope and scale of the transformation. This is all about transforming the economy.”
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