Riyadh, Saudi Arabia.
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Saudi Arabia is moving full steam ahead to focus on domestic investment – yet it is imposing higher requirements on foreigners coming to the kingdom to move capital elsewhere.
An annual report published earlier this week revealed that the kingdom’s $925 billion sovereign wealth fund, the Public Investment Fund, saw its assets rise 29% to 2.87 trillion Saudi riyals ($765.2 billion) in 2023 — with domestic investment a key driver.
The fund’s investments in domestic infrastructure and real estate development rose 15% year-on-year to SAR233 billion, while its foreign investments increased 14% to SAR586 billion. At the same time, the Saudi government has introduced laws and reforms to facilitate and even enforce investment in the country as it builds on its Vision 2030 plan to diversify its oil-dependent economy.
“The PIF report represents a shift from overseas investments to a focus on domestic opportunities,” Tarek Sulaiman, chairman of the American Chamber of Commerce in Saudi Arabia, told CNBC. “The days of looking at Saudi Arabia as just a financial reservoir are over.”
“Today, success with PIF is based on partnerships built on mutual trust and a long-term vision, where stakeholders are expected to contribute capital meaningfully and not just seek profits.”
An example is the Kingdom’s Headquarters Law, which came into effect on January 1, 2024, and requires foreign companies operating in the Gulf to set up their Middle East headquarters in Riyadh if they want contracts with the Saudi government.
Saudi Arabia’s recently updated investment law also seeks to attract more foreign investment – and has set itself a lofty goal of $100 billion in annual FDI by 2030.
That figure now stands at about $12 billion a year since Vision 2030 was announced in 2017, according to data from the kingdom’s investment ministry — still far from that target.
Some observers in the region question the realism of the $100 billion figure.
“The new investment law is very important to facilitate more FDI, but it remains to be seen whether it will lead to the massive increase and amount of capital required,” one Gulf-based investor told CNBC, speaking on condition of anonymity due to professional restrictions.
Sulaiman confirmed this view, noting that increasing spending on major projects will require higher oil prices to achieve balance in the Saudi budget.
“It remains to be seen whether PIF's domestic investments will deliver the expected returns, especially in a region fraught with instability and oil-dependent budgets facing prolonged periods of low oil prices,” he added.
However, the new law “will improve local business conditions to attract investment from abroad,” James Swanston, MENA economist at Capital Economics, wrote in a recent report.
Investors have long complained that vague and often arbitrary rules prevent them from participating more fully in the Saudi economy. According to the Saudi government, the new law will align the rights and obligations of foreign investors with those of citizens, introduce a simplified registration process to replace licensing requirements, and streamline the judicial process, among other things.
“We have long argued that so-called wasta (which loosely translates to who you know) has been a major deterrent to foreign companies establishing themselves in Saudi Arabia,” Swanston wrote.
He added that stimulating more foreign investment “should also ease the burden recently imposed on the Public Investment Fund to compensate for weak foreign investment in the Kingdom.”
No more “dumb money”
The shift toward greater scrutiny and local priorities is not entirely new—indeed, it has gained greater speed every year.
While many foreign companies have long viewed the Gulf as a source of dumb money, some local investment managers — referring to the stereotype of oil-rich sheikhdoms throwing money at whoever wants it — said investing from the region has become much more sophisticated, uses deeper due diligence and is more selective than in years past.
“It used to be much easier to come in and say, ‘I’m a fund manager from San Francisco, please give me a few million,’” Mark Nassim, a partner and managing director at Dubai-based investment bank Awad Capital, told CNBC in 2023.
“I think a very small minority of them will be able to take money from the region – they are much more selective than before.”
If the kingdom’s priority wasn’t clear to foreign investors before, it is now, added the Gulf-based financier, who asked not to be named.
“The PIF has been focused on attracting investment into Saudi Arabia over the past few years. It took some time for bankers to realise the scope and scale of the transformation. It is all about transforming the economy,” he said.