Saudi Arabia’s spending adopts a clear shift in strategy

Saudi Arabia’s focus on inward investment has led to stricter requirements for foreigners visiting the kingdom to bring capital.

Assets at Saudi Arabia’s $925 billion sovereign wealth fund, the Public Investment Fund, are set to grow 29% to 2.87 trillion Saudi riyals ($765.2 billion) in 2023, it said in its annual report released earlier this week, with domestic investment being a big driver.

The fund’s investment in domestic infrastructure and real estate development increased 15 percent from a year ago to 233 billion riyals, while its foreign investment rose 14 percent to 586 billion riyals. At the same time, the Saudi Arabian government has introduced laws and reforms to encourage and even mandate inward investment as it works to diversify the Saudi Arabian economy away from its oil-dependent economy with its Vision 2030 plan.

“The PIF report signals a shift in focus from externally-led investment to domestic opportunities. The days of viewing Saudi Arabia simply as a repository of capital are coming to an end,” Tariq Solomon, chairman emeritus of the American Chamber of Commerce in Saudi Arabia, told CNBC.

“Today, PIF’s success depends on partnerships based on mutual trust and a long-term vision, where stakeholders are expected to not only pursue profits but also make meaningful contributions with their capital.”

One example is the kingdom’s headquarters law, which came into effect on Jan. 1, 2024, requiring foreign companies doing business in the Gulf state to locate their Middle East headquarters offices in Riyadh if they want to secure contracts with the Saudi government.

Saudi Arabia also aims to attract more foreign investment through its recently revised investment law, setting an ambitious goal of reaching $100 billion in annual foreign direct investment by 2030.

That figure currently averages about $12 billion per year since Vision 2037 was launched, according to data from the Saudi Arabian Ministry of Investment, but it is still far from the target.

Some observers in the region question whether the $100 billion figure is realistic.

“The new investment law is absolutely essential to encourage further FDI, but it remains to be seen whether it will translate into a significant increase and volume of needed capital,” a Gulf-based financier, who asked not to be named due to professional constraints, told CNBC.

Solomon agreed, saying increased spending on major projects would require higher oil prices to break even for the Saudi budget.

“It remains to be seen whether PIF’s domestic investments will deliver the expected returns, particularly in a region with oil-dependent finances facing continued instability and a prolonged period of low oil prices,” he said.

Still, the new law will “improve the local business environment to attract foreign investment,” James Swanston, Middle East and North Africa economist at Capital Economics, wrote in a recent report.

Investors have long complained that vague and ad hoc rules have stifled their greater involvement in the Saudi economy. The government says the new law will align foreign investors’ rights and obligations with those of Saudi citizens, replace licensing requirements with a simplified registration process and ease judicial procedures, among other things.

“We have long argued that so-called ‘wasta’ (roughly translated as ‘acquaintances’) are a significant obstacle to foreign companies entering Saudi Arabia,” Swanston wrote.

He added that encouraging more foreign investment “should also ease the burden recently imposed on the Public Investment Fund to compensate for the decline in foreign investment in Saudi Arabia.”

The shift towards stricter surveillance and domestic priorities is nothing new; in fact it has been accelerating year by year.

While many international companies have long viewed the Gulf as a source of “dumb capital,” some local investment managers said investment from the region was far more sophisticated, conducting more thorough due diligence and being more selective than in years past, citing the stereotype of oil-rich emirates handing out money to whoever wants it.

“Before, it was a lot easier to say, ‘I’m a fund manager in San Francisco. Give me a few million dollars,'” Mark Nasim, partner and managing director at Dubai-based investment bank Awad Capital, told CNBC in 2023.

“Only a very small number of banks will be able to receive funds from this region. They are being much more selective than before.”

Saudi Arabia’s priorities weren’t clear to foreign investors before but are now, said a Gulf-based financier, who spoke on condition of anonymity.

“The PIF has been focused on attracting investment into Saudi Arabia for the last few years,” he said. “It took time for bankers to fully understand the scope and scale of this shift, which is really about transforming the economy.”