The Kingdom primed to attract foreign capital

Part 1 / GCC in Review: KSA

With strong budget surpluses stemming from energy demand, a burgeoning tourism industry, and favorable demographic trends Saudi Arabia is well positioned for foreign capital.

In the Gulf Cooperation Council?(GCC) major energy-exporting countries, sustained oil prices above US$80 per barrel can create a strong economic environment. These economies rely on government budgets based around this price level, and when oil prices remain elevated, state coffers become flush with cash. This surplus supports trade surpluses and allows for generous public spending. In this comprehensive four-part series titled "GCC in Review," I examine Saudi Arabia, UAE, Qatar, and the dynamics of their rivalry.

I begin with the case of Saudi Arabia, the Middle East's largest economy, fiscal, labor, and sector-specific reforms have led to a flourishing non-oil based GDP growth. This positive trend is further enhanced by a cascade of social reforms throughout the country, fostering the potential for sustained growth in 2023 and beyond. Additionally, Saudi Arabia's focus on growing its capital markets presents opportunities for foreign capital inclusion, ultimately strengthening the non-oil economy. As Vision 2030 gathers pace, the exuberance of change is nowhere more visible than across the Kingdom’s real estate landscape. In a 2022 keynote address at a Middle East investment forum, I expressed my belief in the promising future of Saudi Arabia, and I still hold that view. The National Transformation plan continues to make waves across the Kingdom, leaving no corner or sector untouched. Riyadh and Jeddah are anticipated to witness remarkable real estate and infrastructure ventures, surpassing a combined value of $200 billion by 2030. Additionally, the establishment of the Saudi Downtown Company reflects the country's commitment to developing vibrant downtown areas and diverse mixed-use destinations in 12 secondary cities. The momentum for growth is palpable.

The vibrant activity in the GCC region stands in stark contrast to Europe's sluggish market

The geopolitical landscape plays a vital role in investment decisions, and Saudi Arabia's geostrategic position is particularly advantageous in the current fragmented global scenario. Notably, the reshaping of the global energy map following Russia's invasion of Ukraine has led to strengthened resource ties between GCC countries and Europe. Saudi Arabia, among other countries, has stepped up its exports of oil and natural gas to Europe, solidifying its energy relationship with the continent. Looking toward Asia, Saudi Arabia's trade ties extend beyond traditional energy sources, evidenced by investments in gaming and cloud computing, the government’s intention to spend a whopping $38 billion building a ‘gaming hub’ in the heart of the country is one example. These investments showcase the breadth of trade between some of the world's fastest-growing economies and Saudi Arabia, underscoring the importance of positioning western investors to capitalize on diversified industries within the country.

Diversification is key in investment strategies, and Saudi Arabia offers promising arenas for growth beyond traditional sectors. Energy adjacent sectors, i.e. renewable energy like solar, wind, hydrogen, and ammonia hold significant potential amid the global pursuit of decarbonization. Investors focusing on infrastructure, real estate, and private equity can benefit from the government's efforts to dynamically expand the country's tourism industry. This expansion caters to rising demands for domestic, religious, leisure, and business travel, generating positive spill over effects on local employment, consumption, and demand for services. The Kingdom is taking significant steps to establish itself as a global mining hub and a key player in the resources sector. Recently, the country's sovereign wealth fund and state miner announced a joint investment to create a fund that will invest globally in vital resources such as copper, nickel, and lithium. These factors collectively contribute to strengthening the outlook for Saudi Arabia's diversified macro economy.

In addition to these sector-specific insights, it is essential to consider the wider macroeconomic picture of Saudi Arabia. The country has retained its position as one of the fastest-growing major economies globally, driven by strong non-oil based GDP growth, which serves as a backbone for employment. Job creation reached a five-year high by the end of 2022, and the non-oil based purchasing managers' index (PMI) expanded at the highest rate in seven years. Confidence in the business sector has also rebounded from the troughs of 2020, thanks to easing global supply-chain issues and moderated inflation.

Saudi Arabia's path to flourishing non-oil based GDP growth has been paved with fiscal rectitude. In the face of low-to-negative oil prices in 2020, the government implemented spending cuts, reduced cost of living allowances, and tripled the value-added tax (VAT). Even during periods of elevated oil prices, successive budgets demonstrate continued restraint in government spending, with a focus on reducing the fiscal deficit. Interestingly, Saudi Arabia's government debt to GDP ratio stands at a modest 30%, in stark contrast to countries like Italy with 147% and the United States with 128%. This fiscal discipline creates an environment of stability and enhances investor confidence in the country's economic outlook.

Saudi Arabia's financial markets have experienced significant developments in recent years, further attracting foreign investors. The Capital Market Authority's (CMA) commitment to improving the regulatory framework has led to an increase in the accessibility of local equity markets for foreign investors. Moreover, the government's willingness to settle trade in currencies other than the US dollar, such as the euro, signals its expanding role in global trade and a potential avenue for increased investment opportunities.

Beyond its economic prowess, Saudi Arabia's geostrategic importance positions it as a crucial trade partner for crisis-hit European countries. It serves as a gateway to the Middle East and North Africa (MENA) region, offering access to emerging markets in Africa. These opportunities extend beyond oil, with deepening cross-border investments and the establishment of strong ties with Asian countries in sectors such as gaming, media, and cloud computing. Saudi Arabia's commitment to exporting green hydrogen and blue ammonia aligns with regional efforts toward decarbonization, creating additional investment opportunities. Furthermore, the country's burgeoning tourism industry presents a significant potential for long-term investments, particularly in infrastructure and real estate.

To summarize, Saudi Arabia's sustained economic growth, coupled with its commitment to macroeconomic and social reforms, positions it as an attractive destination for institutional investors and executives seeking long-term investments in diverse sectors. The country's advantageous geopolitical position, deepening cross-border investments, and potential for growth beyond the oil sector contribute to its significance in the increasingly complex and fragmented global landscape. By capitalizing on Saudi Arabia's robust economic outlook, investors can potentially tap into the numerous investment opportunities emerging across the country's expanding industries.

Though one has not to overlook the fact attracting foreign direct investment (FDI) can pose a significant challenge. In emerging markets, FDI with high capital requirements often involves complex contractual commitments and borrowings, which can add layers of costs and complexities. The country must ensure that the returns on investment compensate for the risks businesses undertake, considering the potential for changing rules and regulations. Multi-billion-dollar mining projects for example require stakeholder approvals and may be less appealing to public shareholders who prefer shorter-term returns and are cautious about large expenditures.

Creating a self-fulfilling cycle of attracting FDI requires reaching a critical mass of investment, which can be facilitated by preferential policies such as tax incentives and free trade zones for domestic and foreign companies. These policies contribute to economies of scale and increased efficiency. For Saudi Arabia, the decision to open up and invite foreign businesses is a substantial step, but it must assess whether it can offer foreign investors a sufficiently attractive opportunity. Evaluating the math behind this equation is crucial for the country's future endeavors. If executed effectively, Saudi Arabia holds the potential to emerge as a prominent investment, tourism, and financial hub which is Primed to Attract Foreign Capital, and to continue its impressive growth trajectory for the foreseeable future.

Part 2 / GCC in Review: UAE

Part 3 / GCC in Review: Qatar

Part 4 / GCC in Review: Rivalry Heats Up