© Reuters. FILE PHOTO: A large banner shows Saudi Vision for 2030 as a soldier stands guard before the arrival of Saudi King Salman at the inauguration of several energy projects in Ras Al Khair, Saudi Arabia, November 29, 2016. REUTERS/Zuhair Al-Traifi
By Davide Barbuscia, Saeed Azhar and Yousef Saba
DUBAI (Reuters) – Saudi Arabia could have a credibility problem if it keeps shifting the goal posts for the amount of foreign investment it wants to turn its vision of a future beyond oil into a reality, financial sources and analysts said.
Five years since Crown Prince Mohammed bin Salman launched Vision 2030 to end the kingdom’s dependence on fossil fuels, foreign direct investment (FDI) remains well short of targets.
When Riyadh unveiled the plan in 2016, it aimed to boost annual FDI to nearly $19 billion by 2020 from $8 billion in 2015, but last year it was just $5.5 billion. The longer-term goal was for FDI to hit 5.7% of gross domestic product (GDP) by 2030, though Riyadh did not give a dollar target.
Now the kingdom has raised the stakes again, saying it wants $100 billion in annual FDI by 2030, a new goal that many analysts consider overambitious.
“(It) does raise eyebrows as to how it looks quite unattainable, particularly that over the past four quarters FDI has totalled $18.6 billion and the total FDI inflow since the start of 2011 is only equal to $92.2 billion,” said Capital Economics economist James Swanston.
To be consistent with its GDP target, the $100 billion goal means the economy would have to expand by 150% to reach $1.75 trillion by 2030 – a level that would have made Saudi Arabia the world’s ninth biggest economy last year, behind Italy and ahead of Canada, South Korea and Russia.
To be sure, the years following Vision 2030’s launch have not been helpful for FDI. A purge of the Saudi business elite in 2017 and the murder of Jamal Khashoggi in 2018 deterred private investment. Then the pandemic struck.
But analysts say the kingdom, and its grand reform plan, may soon start to lose credibility in the eyes of investors.
“Low year-on-year inward FDI levels will eventually stop being perceived optimistically as room for Saudi Arabia to improve and instead beg the question: what’s going on here?” said Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington.
‘FIXING THE SYSTEM’
Saudi authorities say much of the plan is still in its initial phases, which consist mostly of regulations and planning, and money will increasingly start pouring into the kingdom over the next few years.
Saudi Investment Minister Khalid al-Falih said the FDI numbers were already improving.
“We are fixing the system, we are preparing the deals, we are engaging companies,” he told Reuters. “A lot of our transactions are being prepared.”
In the first half of 2021 – excluding the leasing of Saudi Aramco (SE:)’s oil pipelines – FDI rose 33% from the same period in 2020 and was already above targets for this year as a whole, he said.
At Saudi Arabia’s annual “Davos in the Desert” Future Investment Initiative last month, several memoranda of understanding were signed but hopes of a major investment announcement were dashed.
Electric carmaker Lucid, for example, which is majority owned by the Saudi sovereign Public Investment Fund (PIF) and headquartered in Silicon Valley, did not announce a much-anticipated plan to build a factory in the kingdom.
Saudi Arabia did launch a national infrastructure fund, touting it as a strategic partnership with the world’s biggest asset manager, BlackRock (NYSE:), but the U.S. firm is advising Riyadh rather than committing capital.
“Saudi wealth remains attractive to foreign asset managers. Wall Street titans praised the local economy on stage, signed lucrative deals and walked away without committing any of their own capital. Speaks volumes,” said a senior banker in the Gulf.
A BlackRock spokesperson said it had a consulting assignment with the fund, which would be entirely financed by the National Development Fund, a government body, and would then aim to attract capital from other investors.
“It is certainly possible that BlackRock could be amongst these providers of external capital,” the spokesperson said.
In a sign of its desire to attract more investors, Saudi Arabia issued an ultimatum this year that foreign firms must set up their regional headquarters in the country by the end of 2023, or risk losing out on government contracts.
Saudi Arabia has a much larger consumer base than regional neighbours and international firms operating in the Gulf may not want to miss out on lucrative opportunities arising from its plans for economic transformation.
Saudi authorities announced at the investment forum that they had licensed 44 international companies to set up regional headquarters in the capital Riyadh.
But ultimatums, combined with abrupt changes in trade deals and taxation regimes, are perceived as another sign of the kingdom’s unpredictable policies. Many Gulf executives believe firms will find workarounds to stay in Dubai, which has a more developed market and a less conservative society.
Forum attendees speaking on condition of anonymity said there were lingering worries about regulations and taxes as well as high operating costs and a lack of skilled local workers.
The Saudi investment ministry did not respond to requests for comment about the criticisms.
“The Saudi business environment is still notoriously difficult to navigate as a foreign investor”, said Swanston.
“In terms of trying to attain some credibility to the investment goals of Vision 2030 it would be fairly crucial for Saudi to get some real commitments from firms and foreign investors,” he said.
‘COUNTRY WITHIN A COUNTRY’
Progress on NEOM, Vision 2030’s $500 billion signature project https://reut.rs/3qtvm5V, also remains difficult to assess, adding to concerns about the kingdom’s financial transparency https://reut.rs/3HfLv53.
The planned megacity in the desert, announced in 2017 and backed by PIF, is studying its economic and legislative framework, NEOM https://www.neom.com/en-us Chief Executive Nadhmi al-Nasr told Reuters.
Asked how many contracts had been awarded, or how much had been spent, he declined to give detailed answers.
“Honestly, we don’t pay much attention at this time of the progress on how much we awarded, because this is just the start of a long journey. When your ambition is to create almost a country within a country, you’re talking big … we’re not ready to start talking about how much we spent,” he said.
However, giving details of project spending, investments achieved and foreign commitments might help Riyadh gain more credibility, particularly given the size of its targets, analysts said.
Pushing net FDI to $100 billion a year is part of a larger plan envisaging more than $3 trillion in investment in the domestic economy by 2030 and economists fear even local targets will be tough to meet https://reut.rs/3C9enYM.
“At this stage, moving economic goal posts within the 2030 ballpark is still feasible. Yet there will come a day when the final scorecard needs to be tallied and progress can no longer be measured by the ambition of project announcements,” said Mogielnicki.