Size Matters: The Saudi Way to Transform Economy
What Is Happening?
Over the past year, Riyadh has imposed a number of policies that aim to attract international service providers and manufacturers to Saudi Arabia. At the beginning of 2021, Riyadh ordered regional businesses (including Middle East divisions of international companies) to relocate headquarters to Saudi Arabia by 2024 in order to continue business in the country. The kingdom followed up by introducing tariffs on goods manufactured in the GCC, disrupting business for many regional manufacturers who see Saudi Arabia as a key market. The country is indeed the region's biggest consumer market and greatest economy by size.
Competition With the UAE and Away From Oil
Saudi Arabia's aspiration to become the economical centre of the Gulf has long been fuelled by the competition with the UAE, whose more liberal lifestyle has attracted international bankers and consultants as a Middle Eastern home. The kingdom exceeds the UAE in both GDP ($700b over $421b) and population (33 million over 10 million). In addition, around 90% of the Emirati population are expats.
Riyadh's Public Investment Fund, chaired by crown prince Mohammed bin Salman, has pledged to double in AUM to $1.07 trillion by 2025, investing $40b in the domestic economy. The fund aims to invest $3b in new sectors over the next ten years.
Despite these ambitious plans, Riyadh has failed to keep up with the UAE in terms of foreign direct investments (FDIs).
In 2020, FDIs totalled $5.5 billion, with quarterly new foreign investment project record broken twice. Over 50% of new projects focus on manufacturing, construction, retail and professional services & science. In Q1 2021, Saudi Arabia issued a record number of new quarterly FDI licences. However, these investments constitute a quarter of those seen by the UAE in the same period, and is inconsistent with the $100b target figure for 2030.
Another reason behind the kingdom's fight to ensure its leadership in the Middle Eastern economic and business arena are increasingly strong environmental concerns. Even though the world is still to see the peak in fossil fuels demand, the largest oil producer is looking for secure ways to move away from oil revenues. This is indicated by Saudi Aramco's divestments and, indirectly, by the PIF's backing of Lucid Motors, the American electric car manufacturer.
Reputation Blocks Capital Inflow
One of the reasons Saudi Arabia is has so far failed to leverage the size of both its population and its economy is its reputation and tight regulatory environment.
First, political factors play a major role. The infamous events of 2017 and 2018 are examples of reputational damage to the kingdom that limits foreign investor interest.
Secondly, penalties seem to outweigh rewards in Riyadh's endeavour to attract business to the country. The kingdom does offer rewards to those moving to the King Abdullah Financial Disctrict in Riyadh under the "Programme HQ". Incentives include tax holidays, easing on the requirement to employ Saudi workforce, and protection against future regulation changes. However, multinationals are still hesitant to follow. Some of the biggest international companies have agreed to move divisions to Riyadh. In many of those who have chosen Riyadh as their regional HQ, the PIF holds a majority stake (think of Lucid Air).
Workforce in Demand
In addition to reasonable incentives and subsidies, international companies would require access to cheap trained workforce. While executives report decreasing subsidies, the government increasingly requires companies to hire relatively expensive and poorly trained Saudi employees.
The kingdom has been successful in ameliorating domestic unemployment rates and actually increased the proportion of employed women to 33% in five years. However, the relatively lower qualifications and work ethic of the local population will mean that the social policy contradicts the economic targets.
The Saudi investment ministry is sure of its ability to demonstrate the value proposition to multinational companies and foreign investors. If the kingdom is successful in proposing powerful incentives and building a benign regulatory environment, we could see Riyadh become the true economic (and financial!) centre of the Middle East.