After many years of languishing at the lower ends of Middle East foreign direct investment (FDI) league tables, Saudi Arabia is fast becoming the darling of Arab and non-Arab investors. The FDI by the UAE in the kingdom stood at nearly US$5.8 billion (Dh21.3bn) last year, the largest flow by an Arab country, figures released by the Inter-Arab Investment Guarantee Corporation (IAIGC) showed. The figure was more than double the amount the UAE channelled into other Arab countries last year, and nearly 45 per cent of the $12.9bn total investment received by Saudi Arabia from other Arab League members.
This is good news for the kingdom, which had not seemed to match inward investments with its undoubted economic size and potential compared with other Arab and Islamic countries. The reasons were obvious - a sluggish bureaucracy, uncompetitive incentives and taxation regime, multiple layers of governmental approvals and seeming inflexible labour and sponsorship laws. The general feeling in Saudi Arabia was that the domestic market had ample surplus liquidity, unlike other "capital-poor" Arab countries. Continued government spending on major projects would make up for any capital shortfall.
This rosy picture could not last forever in the face of persistent budget deficits from 1983 to 2001, the advent of privatisation as a strategic tool for private sector participation, and the kingdom's accession to the World Trade Organisation in 2006. The time for change had arrived and a fresh perspective had to be found to attract foreign investors. A range of regulatory and structural reforms were introduced to make Saudi FDI attractive, starting with the establishment of the Saudi Arabian General Investment Authority (SAGIA) as a one-stop shop to take care of the investment needs of foreign partners and overcome mindless bureaucracy that had been the hallmark of doing business in the kingdom.
SAGIA was empowered to cut through red tape and assist with licensing, identifying local Saudi joint venture partners and presenting investment opportunities to foreigners. Corporate taxation levels were slashed to 20 per cent and foreign companies were now able to own properties for their operational requirements as well as sponsoring their own employees without having to go through local sponsors.
Foreign investors would also be eligible, like Saudi companies, to concessionary government funding through the Saudi Industrial Development Fund. At the same time, SAGIA gradually whittled down the list of "prohibited" economic activities in which foreigners could not invest, and today the prohibited areas are mainly in security and defence-related sectors. The overriding principle of welcoming FDI to Saudi remained the same, though; priority would be for those that added value through technology transfer and job creation.
This was a new ball game and global investors began to assess FDI opportunities in Saudi Arabia, with its largest GCC consumer and capital goods market. The kingdom's apparent good showing during the recent global economic and financial crises has also helped, as well as ambitious government plans to continue spending on infrastructure and the development of major economic cities. Planned expenditure over the next 20 years totals $400bn. It would have been short-sighted for foreigners who wished to do business in Saudi Arabia to miss out on such opportunities and the UAE has certainly taken the lead.
The IAIGC gave no breakdown for the UAE's FDI in Saudi Arabia, but Emaar and Etisalat are the largest investors in the kingdom. The UAE was the second-largest foreign investor in Saudi Arabia after Japan from 2004 to 2007, but it is expected to top the list with the completion of the giant King Abdullah Economic City project, according to official Saudi data. In terms of projects licensed by SAGIA, the UAE becomes the dominant investor in the kingdom, with a total committed capital of 122.9bn riyals (Dh120.52bn), nearly 41 per cent of the FDI licensed by the authority since it was established in April 2000.
With global uncertainties continuing to plague international investment markets and forecasts of patchy economic growth for the major industrialised countries, the UAE's decision to invest nearer to home makes a lot of sense, because the investments are also protected under GCC rules. The opening up of the Saudi capital market with bond issuance for Saudi and joint venture companies should also provide a further boost to ensure the kingdom finally sits at the high table of FDI commensurate with its economic size and global economic power.
Dr Mohamed A Ramady is a former banker and visiting associate professor, finance and economics, at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia