New foreign direct investment in Saudi reaches 14-year low in blow to reforms

Drop contrasts with trend in GCC states as FDI in UAE, Qatar and Oman rise

DUBAI, June 9, (RTRS): New foreign direct investment in Saudi Arabia has plunged to a 14-year low, figures released this week by a United Nations body show, a blow to ambitious economic reforms which aim to increase inflows of foreign capital sharply.

FDI inflows shrank to $1.4 billion in 2017 from $7.5 billion in 2016, according to figures from the United Nations Conference on Trade and Development, which are in line with data published in recent weeks by the Saudi central bank.

The drop contrasts with the trend in other Gulf Arab oil exporting economies. FDI in the United Arab Emirates, the second biggest Arab economy after Saudi Arabia, rose to $10.4 billion last year from $9.6 billion, UNCTAD said. FDI also increased in Qatar, which was hit last year by an embargo imposed by Saudi Arabia and other countries. Even Oman, an economy a tenth the size of Saudi Arabia, attracted $1.9 billion, up from $1.7 billion.

Saudi reforms launched two years ago aim to boost FDI to $18.7 billion by 2020, in order to create jobs — unemployment among Saudi citizens is nearly 13 percent — and help diversify the economy beyond oil exports.

Economists blame weak foreign investment mainly on the slump of oil prices since 2014. This hurt all the Gulf economies but Saudi Arabia, with a much larger population to support and a far bigger state budget deficit, was forced into more drastic austerity policies than its neighbours. The austerity stifled growth in the Saudi private sector, outweighing the positive impact of reforms to attract investment such as new corporate and bankruptcy laws and a drive to cut red tape, which slashed the time taken to register new firms.

“The poor economy has made foreigners wary of putting in money, despite the economic reforms that are underway,” said Jason Tuvey, Middle East economist at Capital Economics in London.

FDI may start to recover as soon as next year if the economy strengthens, and as the government moves ahead with a privatisation programme that has been slowed by bureaucracy and legal uncertainties.

Authorities could attract tens of billions of dollars of FDI in coming years by selling state assets and involving foreign companies in public-private partnerships to build and operate infrastructure.

Jordanians buy second-hand clothes in an open air market in central Amman on June 8. Jordan’s authorities may have shelved a proposed income tax

hike after a week of protests — but they still face the tricky task of balancing popular demands with the need to fix the economy. (AFP)

Portfolio

Additional tens of billions are expected to come from foreign portfolio investment as Saudi Arabia’s stock market joins global equity indexes, and if Riyadh goes ahead with selling 5 percent of oil giant Saudi Aramco.

Tuvey said, however, that a big jump of FDI was unlikely since oil prices would for the foreseeable future remain the biggest single factor determining the health of the Saudi economy. “Unless we see a further rise in oil prices, FDI will remain relatively low,” he said.

Meanwhile, global foreign direct investment (FDI) fell by almost a quarter to $1.43 trillion last year and the outlook is clouded by risks including trade wars and debt, the United Nations trade and development agency UNCTAD said on Wednesday.

Preliminary figures released earlier this year showed a 16 percent decline, a surprise downturn led by steep reversals in Britain and the United States.

That has been revised to a 23 percent fall, with growth expected to be less than 10 percent in 2018, well below the average over the past decade.

“The report paints a rather depressing picture,” UNCTAD Secretary-General Mukhisa Kituyi told a news conference.

UNCTAD investment chief James Zhan said the steeper decline in 2017 was largely caused by a revision of 2016 data, when more funds flowed into US assets than previously thought. That year marked the end of a wave of “tax inversion” deals, whereby a US firm was acquired by a small foreign business and adopted its domicile to get a lower tax rate.

FDI, a bellwether of globalisation and a potential sign of growth of corporate supply chains and future trade ties, faced many risks that were not adequately reflected in economic growth forecasts, Zhan said.