Arab News, Sun, Dec 10, 2023 | Jumada Al-Uola 26, 1445
Saudi FDI reforms poised to deliver transformative impact
Saudi Arabia:
Saudi Arabia continues to vigorously pursue its reform agenda, with a focus on
bolstering foreign direct investment inflows and diversifying investment
strategies despite a recent deceleration in its financial account as reported by
the Saudi Central Bank and the Ministry of Finance.
In the second quarter of 2023, FDI inflows
experienced a 21 percent decline compared to the same period last year,
amounting to SR6.2 billion ($1.65 billion).
FDI outflows, which encompass the capital invested
by Saudi entities in foreign countries, reached SR18.34 billion, a 53 percent
decrease from the corresponding quarter of the previous year.
Albara’a Al-Wazir, an economist at the US-Saudi
Business Council, said: “Despite the recent decline in FDI to SR6.2 billion, the
number of investment licenses issued by the Ministry of Investment … reached
1,819 in Q2, marking a 94 percent increase compared to the previous year.”
He added: “Saudi Arabia has implemented
significant legal, economic, and social changes to attract higher levels of
foreign direct investment since the launch of Vision 2030.”
Al-Wazir highlighted that the Ministry of
Investment granted licenses to 180 companies to establish regional headquarters
in the Kingdom ahead of the January 2024 deadline.
The economist anticipates that the regional
headquarters program will expedite FDI in Saudi Arabia.
“As companies seeking government projects will
need to relocate, the full impact of this program is expected to manifest in the
medium term, albeit with a potential lag,” he said.
Saudi Arabia has also announced tax incentives for
foreign companies establishing their regional headquarters in the Kingdom,
including a 30-year exemption from corporate income tax.
These measures also encompass zero income tax for
foreign entities relocating their regional headquarters, effective from the
issuance date of the license, as outlined by the Ministry of Investment.
Al-Wazir said the newly introduced NEOM Investment
Fund is strategically positioned to draw investors and play a role in the
development of the new city.
Despite the decline in FDI in the second quarter
of 2023, he emphasized that the Kingdom achieved the second-highest amount in
the Middle East and Africa region during this period.
As per information disclosed by the Ministry of
Investment, the FDI stock, representing the cumulative ownership stakes, equity,
and financial interests held by the Kingdom’s residents in foreign enterprises,
saw a 2.89 percent increase during this period.
The ministry highlighted that this rise signifies
the growing confidence of foreign investors in the Saudi investment ecosystem.
Reforms to the Kingdom’s economy are not new, with
a report from the World Bank issued in 2020 noting the significance of a series
of measures primarily concentrated on starting a business, dealing with
construction permits, and facilitating international trade.
Additionally, the report noted that protections
for minority investors were strengthened, a value-added tax was introduced, and
notable improvements in trading and contract enforcement were implemented.
These reforms collectively demonstrate Saudi
Arabia’s commitment to creating a more efficient and investor-friendly business
environment.
According to the International Bar Association
report on the Kingdom’s FDI legal framework and outlook in April 2023, Saudi
Arabia is witnessing an increasing flow of FDI across various sectors. The main
contributors to this investment surge include France, Japan, Kuwait, as well as
Malaysia, Singapore, the UAE, and the US.
As outlined in the report, key sectors drawing
substantial FDI include the chemical industry, real estate, fossil fuels, as
well as automobiles, tourism, plastics, and machinery. This diversification
indicates a growing interest and confidence from international investors in
Saudi Arabia’s economic landscape.
Data from the Ministry of Investment indicated a
135.4 percent annual increase in the number of investment licenses issued,
reaching 2,192 in the third quarter of this year.
According to the ministry, this surge underscores
Saudi Arabia’s appeal as an attractive investment destination, offering
competitive advantages within a stable and supportive business environment.
Gross Fixed Capital Formation, reflecting
investment in tangible assets like buildings, machinery, equipment, and
infrastructure for production, saw a notable 7 percent increase during this
period totaling SR278.9 billion, as reported by the ministry.
Within this, non-government GFCF accounted for
approximately 85 percent of the total, reaching SR236.6 billion. This marked a
7.6 percent growth compared to the corresponding period last year.
In contrast, government GFCF held a 15 percent
share during this quarter, with a 3.5 percent increase, reaching a total of
SR42.3 billion. This data underscores the significant role of both
non-government and government sectors in driving capital formation within Saudi
Arabia’s economy.
The Kingdom’s financial account, which includes
net values for direct investment, portfolio investment, and reserve assets,
amounted to SR42.97 billion. This figure represents a 70 percent decline
compared to the corresponding period last year, according to the report from the
Kingdom’s central bank.
Portfolio investment, the second component of
Saudi Arabia’s financial account, experienced a 66 percent decrease, primarily
attributed to the Kingdom’s increased borrowings.
Meanwhile, the net acquisition of financial assets
showed a robust 25 percent annual growth in the second quarter, totaling SR50.14
billion. However, this increase was countered by a rise in the portfolio’s
liability section, with debt securities increasing from -SR18.53 billion to
SR25.69 billion during the same period.
According to Al-Wazir: “The Kingdom signaled that
it would utilize debt markets to raise liquidity to fund its projects. The
increase in borrowing via debt securities underscores its commitment to achieve
its desired diversification goals.”
He added: “The Kingdom has more recently issued
both external and domestic debt, with domestic riyal-denominated debt accounting
for approximately 63 percent of the total. In H1 2023, the government issued
SR23 billion in domestic debt, while growing total domestic debt from SR615
billion to SR624 billion.”
Reserve assets, encompassing special drawing
rights and currency, deposits, and securities, witnessed a 70 percent decrease.
This decline is attributed to the devaluation of securities within this
category.
“The topic of drawing down reserves, in this case
securities, is a strategic move to decrease SAMA’s reserve holdings and redirect
cash across a diversified set of vehicles,” explained Al-Wazir.
“Saudi has been adjusting its investment strategy
in recent years whereby it is allocating money to national funds like the Public
Investment Fund and National Development Fund. An example of this is when SAMA
transferred SR150 billion from its foreign reserves to PIF in 2020,” he added.
The economist concluded by asserting that public
debt remains sustainable, comfortably staying below the 50 percent debt to gross
domestic product ceiling, and the fiscal capacity is substantial. He emphasized
that the government’s borrowing strategy primarily aims to lengthen maturities,
reduce refinancing costs, and establish a yield curve.