Saudi Arabia Makes Another Play For Foreign Capital, Launching Inward Investment Agency

The government of Saudi Arabia is making another bid to attract more international investors, by setting up a dedicated agency to try and turn around its underwhelming record on attracting inward investment.

On August 2, the cabinet agreed to set up the Saudi Investment Promotion Authority, which will be headed by investment minister Khalid Bin Abdulaziz Al-Falih.

Al-Falih said in a statement that the new body would enable an integrated approach between government agencies to encourage more investment and support partnerships between local and foreign investors.

Foreign investment is a critical part of the plans set out by crown prince Mohammed Bin Salman to transform the Saudi economy. His Vision 2030 programme aims to wean the country off its dependence on oil and gas revenues, but the high oil prices of this year have underlined just how integral hydrocarbons still are to its economic prospects. The economy grew by 11.8% in the second quarter of this year, it’s highest level for more than a decade, with oil sector growth expanding by 23.1% and non-oil growth of 5.4%.

The amount of investment the country wants to attract is huge. For the futuristic city of Neom, which is being constructed in the sparsely-populated northwest of the country, the Saudi authorities are hoping to draw in some SR600 billion ($160 billion) – with much of that to come from regional sovereign wealth funds and private investors, as well as through a local stock market listing.

But the country’s ambitions go far beyond that. Under a National Investment Strategy launched in October, the government is aiming to attract SR388 billion ($103 billion) a year of foreign direct investment (FDI) by 2030. That, it hopes, will encourage the growth of new sectors of the economy.

To put that target in context, the entire Middle East and North Africa region only had net FDI inflows of $66 billion in 2020, according to the World Bank. The most successful countries in the region at attracting investment were Israel and the UAE, with $24 billion and $20 billion respectively. Saudi Arabia drew in $5.4 billion that year, just behind Egypt (which itself has been the beneficiary of significant Saudi investment this year).

The Saudi kingdom trails many of its neighbours on other measures too. In terms of FDI as a proportion of gross domestic product, Saudi Arabia was behind ten other Middle East and North Africa countries in 2020, according to World Bank data.

Muted performance

The Saudi authorities have struggled in recent years to attract the scale of investment they want, amid investor concern about human rights issues as well as a preference by multinational companies to base their Gulf operations in Dubai.

A shock collapse in inward investment in 2017 saw it fall to just $1.4 billion that year, compared to $7.5 billion a year earlier. Since then it has increased but, with the exception of the second quarter of 2021 – when there was a particularly large transaction involving Saudi Aramco pipelines – it has stayed at a relatively low level.

According to the most recent data from the Saudi Central Bank (Sama), there was inward investment of $1.97 billion in the first quarter of 2022 – the second-best quarterly performance since late 2016. If the government is to hit its target it needs to be averaging around $25 billion a quarter – more than 12 times the current rate.

The creation of the new investment agency comes two-and-a-half years after another institutional change. In February 2020, the Saudi Arabian General Investment Authority (Sagia) was transformed into what is now the Ministry of Investment, with former energy minister Al-Falih appointed to head it up.