Investing in the newly-diversified Saudi economy

Investing in the newly-diversified Saudi economy

The necessity of Saudi Arabian diversification has been discussed since petroleum prices began to plummet last year. Many are questioning the country’s reliance on the resource, as the uncertain future may require a change in policy.

The real question remains: if the environment in Saudi Arabia is ripe for investment, how should businesses go about investing? What risks should they be wary of, and what sort of mitigation tactics should be employed in order to make this investment feasible?

Saudi Government Reforms

The 2000 Foreign Investment Act was the first significant change enacted by the Saudi government to attract investment. This liberalization of the market involved the important establishment of the Saudi Arabian General Investment Authority (SAGIA). This institution has become the primary means of communication for investors in an attempt to centralize and facilitate business.

The mission statement of SAGIA involves the general oversight of investment affairs, including communicating with the Supreme Economic Council, submitting plans to improve the investment climate, as well as monitoring, coordinating, evaluating, organizing, and developing all projects.

The most recent significant change to the Saudi investment environment was the June 2015 reform to the Tadawul, which is regulated by the Capital Market Authority. This reform states that qualified foreign financial institutions, referred to as Qualified Foreign Investors (QFI), will be permitted to invest in shares listed on the Saudi stock exchange. An increase in investment has been reported since this change, which can be seen as a key first step in future growth.

Invesco Asset Management reported in September 2015 that, of the sovereign wealth funds, family offices, and pension funds surveyed, there was a significant increase in their interest to boost investment to Saudi Arabia. Some fund managers around the world are still holding back, remaining skeptical of stability in the region and in the country itself.

It should be noted that QFIs are subject to restrictions in terms of the maximum amount that can be invested. This shows that there is still uncertainty and a lack of confidence, which simply takes time to change.

Other actors are working to create forums for government officials and businesses to discuss issues of transparency, accountability, and governance. The Pearl Institute, for example, is an independent, non-for-profit institution that hosts events such as Corporate Accountability Matters: Business Integrity and Value Creation Beyond 2015, held in April 2015 in Dubai.

Attracting Investment

The reforms by the Saudi government are showing foreign investors that they are interested in attracting businesses from around the world, in order to diversify away from the oil and gas sectors.

The Saudi government has also concentrated on various changes in spending with regards to training, which is making the worker market more attractive. Various programs exist so that foreign companies can participate in these reforms.

Since joining the World Trade Organization (WTO) in 2005, Saudi Arabia has seen record spending on education, training, health, and social development. The government has also slowly but surely adjusted various intellectual property laws to parallel those of the WTO community.

Progress Takes Time

Although developments have been noticed, the World Bank’s Doing Business 2015 ranked Saudi Arabia 49th worldwide in terms of doing business, a drop from 44th in 2014. The most significant change seen in the past year, as per the World Bank, has been an increased difficulty in starting a business and trading across borders.

Real GDP growth is expected to remain around 3.3% in 2015, and a 13.3% deficit is expected, due to low petroleum prices and general government spending. Concentration on economic diversification is repeatedly mentioned as the most significant trend in Saudi Arabia over the next few years, especially in terms of infrastructure; rail, housing, and ports.

Besides infrastructure investment, the Saudi IT, electricity, minerals, and health care industries are all growing. It is important to note the government’s major role in these projects and that there are increasing opportunities for private and foreign businesses to participate.

How Companies Can Mitigate Corruption Risk

Although the lack of transparency and good governance are being addressed, risks of corruption are still prevalent and affect industries in different ways. Transparency International ranked Saudi Arabia 55/175 in the 2014 Corruption Perceptions Index, with a score of 49/100 – with 0 meaning ‘highly corrupt’, and 100 being ‘very clean’.

The Anti-Corruption Commission (ACC) reported the results of a recent survey; showing that 44.9% of public sector employees would be willing to report corruption, and work with the ACC to fight corruption. This is good news, but the number would almost definitely be different in practice, especially seeing as 17.6% of those surveyed admitted to turning a blind eye to corruption they knew was occurring.

There are ways to mitigate against risks that can be faced when investing. For example, it is highly recommended to partner with a local company and/or distributor as to ensure proper procedures are followed, and to take advantage of all opportunities. Local legal counsel is also recommended, as even ‘international’ counsel may not be aware of all details associated with Saudi law and regulation.

There is much opportunity for investors and businesses from all around the world in the Saudi economy, as it is growing, continuing to lead the Gulf region, and the government is very much interested in economic diversification. Threats that companies have feared in the past are being addressed by the government, and there are possibilities to mitigate risk that can be employed by businesses to make investment even more feasible.

About Author

Louis-Claude Perrault-Carré

Louis-Claude is completing his MSc in Security Risk Management at the University of Copenhagen, following his undergraduate degree at the University of Western Ontario in London, Ontario, Canada. Coupling his studies with part-time work at a political risk firm, Louis-Claude is also a founding member of the Leadership & Democracy Lab. He has been able to lead various research groups, most notably acquiring the group's first ever risk consulting contracts.