Riyadh, Saudi Arabia.
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Saudi Arabia is focusing heavily on domestic investment – and is therefore placing higher demands on foreigners who come to the kingdom to raise capital elsewhere.
The Public Investment Fund, the kingdom's $925 billion sovereign wealth fund, saw assets grow 29 percent to 2.87 trillion Saudi riyals ($765.2 billion) in 2023, according to its annual report released earlier this week – and local investment was a key driver.
The fund's investments in domestic infrastructure and real estate development rose 15% year-on-year to 233 billion riyals, while its foreign investments rose 14% to 586 billion riyals. At the same time, the Saudi government introduced laws and reforms to facilitate and even mandate investment in the country as it expands its Vision 2030 plan to diversify its oil-dependent economy.
“The PIF report marks a shift away from externally driven investment and toward a focus on domestic opportunities. The days of viewing Saudi Arabia as just a financial reservoir are over,” Tarik Solomon, chairman emeritus of the American Chamber of Commerce in Saudi Arabia, told CNBC.
“Today, the success of the PIF depends on partnerships based on mutual trust and a long-term vision. Those involved are expected to make a meaningful capital contribution and not just seek profit.”
One example is the Kingdom's Headquarters Law, which came into force on January 1, 2024, and requires foreign companies operating in the Gulf region to locate their Middle East headquarters in Riyadh if they want to sign contracts with the Saudi government.
Saudi Arabia is also aiming to attract more foreign investment with its recently updated investment law. The country has set itself the ambitious goal of attracting $100 billion in foreign direct investment annually by 2030.
Currently, according to the Kingdom's Ministry of Investment, this amount has averaged around $12 billion per year since the announcement of Vision 2030 in 2017 – and is therefore still far from this target.
Some observers in the region are skeptical whether the $100 billion figure is realistic.
“The new investment law is absolutely crucial to allow more foreign direct investment, but it remains to be seen whether it will lead to the huge increase and level of capital required,” a Gulf-based financier told CNBC, speaking on condition of anonymity due to professional restrictions.
Solomon echoed this sentiment, pointing out that increased spending on major projects would require an increase in break-even oil prices for the Saudi budget.
“It remains to be seen whether the PIF's domestic investments will deliver the expected returns, especially in a region fraught with instability and oil-dependent households facing prolonged periods of low oil prices,” he said.
Nevertheless, the new law will “improve local business conditions to attract foreign investment,” wrote James Swanston, Middle East and North Africa economist at Capital Economics, in a recent report.
Investors have long complained that opaque and often ad hoc regulations prevent greater involvement in the Saudi economy. The new law will equate the rights and obligations of foreign investors with those of citizens, introduce a simplified registration process that replaces the licensing requirement, and facilitate legal recourse, among other things, according to the Saudi government.
“We have long argued that so-called 'wasta' (loosely translated, 'who you know') is a major obstacle for foreign companies seeking to establish themselves in Saudi Arabia,” Swanston wrote.
Encouraging greater foreign participation “should also ease the burden recently placed on the Public Investment Fund to offset weaker foreign investment in the Kingdom,” he added.
No more “stupid money”
The move toward greater control and stronger domestic policy priorities is not exactly new – in fact, it has gained momentum year after year.
Many foreign companies have long viewed the Gulf as a source of “dumb money,” said some local investment managers – alluding to the cliché that oil-rich sheikhdoms shower money on anyone who wants it – but investments from the region have become much more sophisticated, more scrutinized and more selective than in previous years.
“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,'” Marc Nassim, partner and managing director at Dubai-based investment bank Awad Capital, told CNBC in 2023.
“I think only a very small minority of them will be able to accept money from the region. They are much more selective than they used to be.”
If the kingdom's priority for foreign investors was not clear before, it is now, said the Gulf-based financier, who wished to remain anonymous.
“PIF has been focused on attracting investment to Saudi Arabia over the past few years,” he said. “It has taken a while for bankers to fully appreciate the scope and magnitude of the turnaround. It is rightly about transforming the economy.”
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