Saudi Arabia's Vision 2030 to establish a more open economy

After recording consecutive declines for seven years, the flow of foreign direct investment (FDI) into Saudi Arabia returned to growth in 2015, increasing by 1.6% to $8.1bn, according to the UN Conference on Trade and Development. The declining trend in FDI inflows in recent years has represented a reversal of the surge in inward FDI that followed the Kingdom’s ascension to the World Trade Organisation in 2005, a development that for most observers represents the starting point of the nation’s gradual opening up of its economy. The drops in FDI suggested that the pull factors with regard to FDI, such as a large domestic market with high disposable incomes, sound infrastructure, a strong banking system governed by a well-regarded regulator and a history of economic stability, were failing to overcome the concerns of international investors, and the issue has become a key focus for the Kingdom’s rulers as they set about reshaping the nation’s economy. The increase in FDI recorded in 2015 signals that the government’s efforts to boost FDI levels are starting pay off.

The Challenge

The government has taken steps to encourage FDI, most notably in its gradual shrinking of the negative list for investment, which stipulates the economic activities blocked to foreign entities. However, a number of other issues represent real obstacles to increased FDI. Commonly cited concerns include an inadequate legal framework for resolving commercial disputes, weak intellectual property legislation and the process of Saudiisation by which the government establishes quotas of Saudi employees for companies. Since the second half of 2015, the matter of slow payments for government contracts has also emerged as a potential disincentive to investment, although this challenge is expected to be resolved as the government implements the National Transformation Programme (NTP).

Long-term issues tend to be related to the more mundane aspects of business formation. As recently as 2013 a report issued by international law firm Dentons and its local partner Wael A Alissa made reference to increased restriction of foreign investment due to a more onerous policy regarding the foreign investment licences needed if a company wishes to deploy their capital in the Kingdom.

Conundrum

Some of the effects of this trend became apparent in 2014 when, in June of that year, the Saudi Arabian General Investment Authority (SAGIA) reduced the number of foreign investment licences from 9265 to 6000 on the grounds that the firms concerned had failed to comply with new regulations aimed at promoting value-added investment. The intention of this stance was to encourage the transfer of advanced technology and create job opportunities for Saudis, yet its implementation negatively affected foreign investment. It also resulted in complaints to the Board of Grievances, the commercial court that oversees the arbitration process.

The government, it seemed, was grappling with an FDI conundrum that is common to hydrocarbons-rich states across the GCC: how to harness the capital and know-how of the international investment community while protecting the interests of domestic investors and the labour market.

Policy Response

A sustained dip in oil prices and a set of fresh faces at the top of the administration seems to have ushered in a more accommodative stance towards foreign investment. A clear indication of this came in late 2015 at the US-Saudi Investment Forum hosted jointly by SAGIA, the Council of Saudi Chambers and the US-Saudi Arabian Business Council. Given the close economic ties between the two nations, the event was a calendar highlight and an important reaffirmation of Saudi-US commercial relations. What was most interesting about the event, however, was a number of signals that suggested the Kingdom is convinced of the need to further open up its economy to foreign investment. One of the most significant of these was the SAGIA announcement that it intends to ease restrictions on international investors and allow them to own 100% of retail and wholesale businesses. This is welcome news for those wishing to enter one of the fastest-growing retail sectors in the world, which has expanded at around 10% per annum over the past decade.

In early 2016 the Saudi government also revealed plans to open the state-owned oil giant Saudi Aramco to foreign investment, and raised the possibility of allowing more foreign banks to enter the market.

First Steps

Beyond the politics and statements of intent, SAGIA has already taken some practical measures aimed at encouraging FDI to the Kingdom. In March 2016 it announced plans to accelerate the licensing process by reducing the requirements to three: a board resolution declaring intent to invest in Saudi Arabia; an outline of the investment plan and its economic impact; and a document demonstrating the investor’s financial ability to carry out operations.

There has also been some adjustment to the duration of licences, with the introduction of a three-year exploratory licence under which companies can assess the market and build organisational capabilities, and temporary, single-use licences for the implementation of specific contracts with government and quasi-government agencies. Investors can then extend their licence for a period of up to 15 years. SAGIA has undertaken to grant foreign investors their licences within five days of the initial application.

The question of visas has also come to the fore in 2016. SAGIA has cooperated with the Ministry of Labour and other government agencies to adjust visa requirements for investors and general managers, bringing them closer in line with international norms, although business visit visa requirements remain among the most stringent in the region.

Vision 2030

Much of the signalling around foreign investment that took place in 2015 might be seen as a prelude to the FDI goals enshrined in the Vision 2030 strategy unveiled in April 2016. The Kingdom’s new blueprint for its economic future contains the most detailed insight yet into the government’s thinking regarding foreign investment, starting with the statement that it wishes to increase FDI from its current level of 3.8% of GDP to an “international level” of 5.7%. The NTP aims to raise direct FDI from SR30bn ($8bn) to SR70bn ($18.7bn) by 2020, as well as increase FDI’s percentage of GDP, compared to the international average, from 24% to 200%.

To achieve this ambitious target, the Kingdom intends to facilitate the movement of people and goods across its borders by streamlining Customs procedures at its ports and creating a business environment that is attractive to domestic and foreign investors. The rationale for this aspect of the Vision 2030 strategy extends beyond that of a capital raising exercise. The Kingdom wishes to make a qualitative improvement in both the capacities of its human resource and the technologies that underpin them.

Rising Star

The retail sector is highlighted as a principal beneficiary of this process, with the authorities planning to boost the contribution of modern trade and e-commerce to 80% of sectoral activity by 2020. This will be achieved by attracting both regional and international retail investors and by easing restrictions on ownership and foreign investment.

Regional Ties

In terms of international trade, Vision 2030 highlights the Kingdom’s well-established trading relationships with its fellow members of the GCC, other Arab countries and foreign markets further afield. Strengthening current economic ties and establishing new business partnerships is an obvious priority, but within the wider objective lies a strong regional focus that brings together a series of schemes that have been advanced, but progressed little, over the past decade or more.

Vision 2030 states, “Among our top priorities is to fortify and extend our interconnectivity and economic integration with other GCC countries. We will strive to complete the process of implementing the GCC common market, unifying Customs, economic and legal policies, and constructing shared road and railway networks. We will seek to effectively link with other countries in the region, through enhanced logistics services and new cross-border infrastructure projects, including land transport projects with Africa through Egypt. Logistical and trade exchanges will be streamlined, further cementing our pre-eminent position as a major trade hub.”

With the Kingdom seeing a budget deficit of $98bn in 2015, which is the first time since the 1990s that there has not been a surplus, there is a new urgency propelling supranational projects that bring the possibility of increased economic activity.

In this context, the April 2016 agreement reached between Saudi Arabia and Egypt to construct a Red Sea bridge connecting the two countries can be seen as a demonstration of Saudi Arabia’s determination to boost regional connectivity and capital flows.