Saudi Arabia’s FDI reforms set for key impact 

Saudi Arabia’s unwavering commitment to its ambitious Vision 2030 reform agenda has positioned the Kingdom as a key player in the global economic landscape. Despite a recent deceleration in the financial account, the Saudi Central Bank and the Ministry of Finance reveal a strategic focus on bolstering foreign direct investment (FDI) inflows and diversifying investment strategies.

FDI Trends and Vision 2030 Impact

In the second quarter of 2023, FDI inflows experienced a 21 percent decline compared to the same period last year, totalling SR6.2 billion ($1.65 billion). However, Albara’a Al-Wazir, an economist at the US-Saudi Business Council, notes that this dip in FDI is counteracted by a significant 94 percent increase in investment licenses issued by the Ministry of Investment, reaching 1,819 in Q2.

Al-Wazir attributes this surge in investment licenses to the substantial legal, economic, and social changes implemented since the launch of Vision 2030. Notably, the Ministry of Investment granted licenses to 180 companies to establish regional headquarters in the Kingdom, providing a forward-looking approach to attract global businesses.

Regional Headquarters Program and Tax Incentives

The newly introduced regional headquarters program is expected to expedite FDI in Saudi Arabia. Companies seeking government projects will need to relocate, and the full impact of this program is anticipated to manifest in the medium term, albeit with a potential lag, according to Al-Wazir. Moreover, tax incentives play a pivotal role, with foreign companies establishing their regional headquarters enjoying a 30-year exemption from corporate income tax and zero income tax.

The introduction of the NEOM Investment Fund further adds strategic value, drawing investors and contributing to the development of the new city, aligning with Saudi Arabia’s long-term vision for economic growth.

Reforms and Growing Confidence

Saudi Arabia’s commitment to economic reforms is evident in a series of measures outlined in a 2020 World Bank report. Reforms concentrated on starting a business, dealing with construction permits, and facilitating international trade. Protections for minority investors were strengthened, a value-added tax was introduced, and improvements in trading and contract enforcement were implemented, creating an efficient and investor-friendly business environment.

As foreign investors display growing confidence, the FDI stock in Saudi Arabia saw a 2.89 percent increase during the recent period, as disclosed by the Ministry of Investment. The surge in FDI licenses and cumulative investments underscores the Kingdom’s appeal as an attractive investment destination.

International FDI Surge and Sectoral Diversification

The International Bar Association’s report on the Kingdom’s FDI legal framework in April 2023 reveals a surge in FDI across various sectors. Key contributors include France, Japan, Kuwait, Malaysia, Singapore, the UAE, and the US. Notably, sectors such as the chemical industry, real estate, fossil fuels, automobiles, tourism, plastics, and machinery are drawing substantial FDI, indicating a diverse and robust economic landscape.

Economic Indicators and Capital Formation

Data from the Ministry of Investment highlights a 135.4 percent annual increase in the number of investment licenses issued, reaching 2,192 in the third quarter of the year. Gross Fixed Capital Formation (GFCF), reflecting investment in tangible assets, saw a notable 7 percent increase during this period, totalling SR278.9 billion.

The significant role played by both non-government and government sectors in driving capital formation underscores the Kingdom’s commitment to sustainable economic growth.

Financial Account Trends and Strategic Borrowing

While the financial account witnessed a 70 percent decline, Al-Wazir sheds light on the Kingdom’s strategic use of debt markets to raise liquidity for projects. The increased borrowing via debt securities aligns with Saudi Arabia’s commitment to achieving diversification goals.

The allocation of funds to national funds like the Public Investment Fund and National Development Fund showcases the Kingdom’s strategic move in adjusting its investment strategy. This includes transferring reserves to redirect cash across a diversified set of vehicles, emphasising a forward-thinking approach.

Sustainable Public Debt and Fiscal Capacity

Al-Wazir concludes by asserting the sustainability of Saudi Arabia’s public debt, staying comfortably below the 50 percent debt to gross domestic product ceiling. The government’s borrowing strategy aims to lengthen maturities, reduce refinancing costs, and establish a yield curve. This strategy reflects the Kingdom’s substantial fiscal capacity and commitment to responsible financial management.

In conclusion, Saudi Arabia’s reform agenda, driven by Vision 2030, showcases a resilient approach to economic challenges. Despite a recent dip in FDI inflows, the Kingdom’s multifaceted strategies, including tax incentives, regional headquarters programs, and sectoral diversification, position it as an attractive destination for foreign investors. The Kingdom’s adaptability, strategic borrowing, and commitment to sustainable economic growth offer valuable lessons for global economies navigating similar transformations. As Saudi Arabia continues to shape its economic destiny, the international community can glean insights from its experiences to foster economic resilience and attract foreign investment.