Bilateral agreements and international investments are reviving investor confidence in Saudi Arabia

 

The first foreign visit of US President Donald Trump’s term saw business leaders from Saudi Arabia and the US signing nearly $400bn worth of agreements and deals. These commercial agreements were designed to foster mutual benefits and investments in both countries. King Salman bin Abdulaziz Al Saud met President Trump just over a year after the publication of Saudi Vision 2030, a period in which the government of Saudi Arabia cemented a number of high-profile bilateral agreements with key trading partners. The period also saw the country’s main sovereign wealth vehicle, the Public Investment Fund (PIF), making a series of international investments in growth industries around the world.

Reviving Investment

Foreign direct investment (FDI) peaked in 2008 at $39.5bn, according to the UN Conference on Trade and Development (UNCTAD), but by 2015 the value of FDI had fallen to $8.14bn – about one-fifth of 2008 numbers. Commenting on this trend, a 2016 report on international trade and investment by Jadwa Investment suggested economic reforms initiated in the new millennium attracted inflows, increasing from a little under $2bn in 2004 to almost $40bn in 2008, but that delays in enhancing the trading environment – coupled with global financial volatility and regional instability – drew foreign capital to countries with more rapidly improving business conditions. According to UNCTAD, the change came with the global financial crisis. Leading sectors for FDI in 2008 were real estate with $11.9bn; construction ($5.7bn); finance ($3.7bn); chemicals and chemicals products ($3.4bn); transport, storage and communications ($3.1bn); and public administration and defence ($2.6bn).

However, shortly after, investment began moving towards Asian markets. In 2009 India and Saudi Arabia had similar inflows of foreign capital at $35.6bn and $36.5bn, respectively. In subsequent years funds to Saudi Arabia started declining, while growing steadily in India: by 2015 foreign companies were investing $44bn in India, the fourth-highest amount for any country in Asia. In 2015 the areas attracting the highest levels of FDI were Hong Kong with $175bn, China at $135bn, and Singapore with $65bn. To compare, Vietnam attracted $11.8bn and the UAE took in $11bn in that same year.

Jadwa Investment estimated FDI declined further in 2016 to $4.9bn but anticipated an increase in 2017 as Vision 2030 and the National Transformation Programme (NTP) 2020 revived investor confidence. As a result of reforms, FDI is forecast to reach $14.8bn by 2020 and $76.6bn by 2030. This is in line with but slightly below the government’s outlook of $95.6bn and FDI targets of 5.7% of GDP in 2030.

Easing Business Conditions

In February 2016 the Saudi Arabian General Investment Authority took steps to smooth trading conditions for foreign companies by reducing the number of documents required to obtain a trading permits, and cutting the time to award the licence to five working days. It also allowed businesses to extend their permits for up to 15 years.

Additionally, in June 2016 the Kingdom increased the foreign investment ceiling in the wholesale and retail sector from 75% to 100%. However, it set conditions that a foreign firm must invest at least SR200m ($53.3m) in the first five years after obtaining government permission. There are further improvements in the NTP, including a reduction in times to issue a work visa for an expatriate from 30 to 10 days and a revision in time to receive a new business permit to one day.

Remaining Challenges

The country’s planners have set ambitious targets for the commercial environment. One goal of the NTP is to see Saudi Arabia ranked 20th in the World Bank’s 2020 “Doing Business” report, from its 2018 ranking of 92nd out of 190. The World Economic Forum’s “Global Competitiveness Report 2017-18”, which factors in the economic strength of each country, ranked Saudi Arabia 30th out of 139 economies. The authors point out that in common with its GCC neighbours, and despite privatisation efforts, state-owned enterprises equalled 19.8% of GDP. Continued privatisation, reductions in regulatory barriers, a more welcoming environment for foreign investment, and the development of small and medium-sized enterprises could notably improve the Kingdom’s rankings. Logistical challenges also remain, especially for export-oriented businesses. “The toughest part of doing business is regional transport, where security issues have made export to nearby markets more challenging,” Mohamad Dawod, CEO of Abdullah Shamsan Industrial Group, told OBG.

Fortifying Relationships

In the first half of 2017 Saudi Arabia’s leaders cemented alliances with partners in Malaysia, Indonesia, Brunei, Japan, China and the US. In addition to diplomacy, trade was high on the agenda. Saudi Aramco, the state-owned energy company, forged deals to enlarge its footprint in its leading customer countries for crude oil. The oil giant made an agreement with Malaysian oil and gas company Petronas to build a refinery and petrochemicals complex. In Indonesia state-owned oil and natural gas corporation Pertamina and Saudi Aramco agreed to expand their $6bn refinery. Among the $65bn in deals in China was a memorandum of understanding (MoU) with state-run manufacturer Norinco to build a refining and chemicals complex in Liaoning Province. Additionally, Saudi Basic Industries Corporation (SABIC) signed an agreement with Sinopec to explore potentially building petrochemicals facilities in China and Saudi Arabia.

Looking West

Both SABIC and Saudi Aramco have made inroads with the US, a key oil importer. SABIC and ExxonMobil announced during President Trump’s visit to Saudi Arabia that they would look into building a petrochemicals complex in San Patricio County, Texas. In May 2017 Saudi Aramco pledged to spend $18bn over five years expanding its business with Motiva Enterprises, including the Port Arthur refinery, the largest oil refinery in the US, producing 600,000 barrels per day. Motiva Enterprises was a joint venture (JV) between Saudi Aramco and Royal Dutch Shell, but in March 2017 the former paid $2.2bn to buy out the latter’s share, including 24 terminals and the Port Arthur refinery.

While many deals have focused on building value in domestic businesses, the FDI impact for the country has been limited. However, in 2017 two new petrochemicals complexes came on-stream, boding well for future production. Sadara Chemical Company, a JV with Dow Chemical, built a petrochemicals complex in Jubail, while Sumitomo Chemical of Japan has partnered with Rabigh Refining and Petrochemical Company on its Phase II expansion project on the Red Sea. The JV agreements and MoUs between Saudi Aramco and US companies included pledges to create 16,500 jobs for Saudis.

Such ventures are not limited to petrochemicals producers. Companies in a number of segments are seeking out external investment. “Manufacturing companies are looking to launch JVs with foreign partners, as they can provide new designs and expertise, while we can provide local knowledge, strong logistical support, and the necessary workforce,” Abdullah Alomair, general manager at Riyadh Furniture Industries, told OBG. “This type of collaboration offers a lot of potential for both local companies and foreign investors.”

Defence Localisation

The international defence industry can create jobs in equipment manufacture, assembly and repair. Vision 2030 aims for half of military equipment to be sourced from Saudi firms by 2030, up from 2% in 2016. There are plans to build a local factory for the construction and assembly of Ukrainian Antonov/Taqnia AN-132 turboprop aircraft, and of Chinese CH-4 unmanned aerial vehicles. In December 2016 the Saudi Defence Electronics Company, a $6m JV, was created with Turkish company Aselsan and domestic firm Taqnia Defense and Security Technologies.

The deal includes construction of a factory in Saudi Arabia to make radar, electronic warfare and electro-optical equipment. Additionally, President Trump’s visit saw $110bn in defence deals to assemble 150 S-70 Black Hawk helicopters, while aerospace and defence company General Dynamics agreed to localise the design, engineering and manufacture of armoured vehicles. This will create a number of employment opportunities for both military and civilian clients.

Share

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Saudi Arabia 2018

Industry chapter from The Report: Saudi Arabia 2018

The Report: Saudi Arabia 2018

The Report

This article is from the Industry chapter of The Report: Saudi Arabia 2018. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart