Saudi Arabia’s ability to attract FDI becomes a big success story

By KHALIL HANWARE | ARAB NEWS

SAUDI Arabia’s recently announced 2011 budget shows the government’s dedication for continued public spending in order to create a positive investment environment and bolster economic growth. The increased government expenditure serves to maintain the country’s focus on development and investment programs in order to ensure strong and sustainable economic growth.

Saudi Arabia’s ability to attract growing quantities of foreign direct investment (FDI) has over the past decades emerged as one of the most impressive success stories of the Gulf region and a sign of its growing integration in the global economy. None of the countries in the Middle East came close to Saudi Arabia in terms of FDI in 2009.

The Saudi Arabian General Investment Authority (SAGIA) plays an important role in creating an environment conducive to investment in the Kingdom. SAGIA has been striving since 2004 to place the Kingdom among the top 10 most competitive nations in the world.

The sources of the largest FDI inflows into the Kingdom in 2009 were the US with $5.8 billion, Kuwait with $4.3 billion, the UAE with $3.8 billion, France with $2.6 billion and Japan with $2 billion.

Much of the country’s FDI in 2009 was destined for high-tech projects and services, but inflows generally covered a wide range of economic sectors such as real-estate investment and infrastructure, building contracts, banking and insurance, quarrying, mining, oil and gas exploration, transportation, telecommunications and information technology.

As much as the hydrocarbon sector still dominates the Kingdom’s economy the development of sectors outside of petrochemicals has significantly gathered pace in recent years, moreover in ways that seem less and less cyclically sensitive.

The share of the oil and gas sector in Saudi Arabia’s GDP (in constant 1999 prices) declined from 34.1 percent in 2000 to 33.3 percent in 2005 and thereafter to 28.1 percent in 2009, NCB Capital said in a recent report.

SAGIA has to play a vital role as international investors take into consideration the great potential of the Saudi economy, the largest in the Middle East and among the top 20 in the world. It is worth mentioning that reports from United Nations Conference for Trade and Development (UNCTAD) have shown that the Kingdom of Saudi Arabia has the potential to attract more FDI.

Recent statistics show that the discrepancy between the potential to attract FDI and actual FDI inflows is closing and a significant decrease in the gap occurred during the last two years of 2008 and 2009. SAGIA faces its biggest challenge as it aims at doubling the levels of FDI annual inflows. FDI inflows to the Kingdom in 2009 are distributed over a wide range of economic sectors, most important of which are:

• Real estate;

• Construction;

• Financial services;

• Petrochemicals and mining;

• Transportation infrastructure;

• Telecommunications and information technology.

Saudi Arabia’s recent reforms helped increase the country’s ranking last year. These reforms made it easier to do business in Saudi Arabia by reducing the required complexity, time and cost to start a business and obtain construction permits in the Kingdom.

“Saudi Arabia’s reforms demonstrate the country’s determination to create a very attractive destination for investment opportunities in the world. Investors need to learn more about the positive business environment in the Kingdom and join in the growth of the business community,” John Sfakianakis, chief economist at Banque Saudi Fransi, said.

Saudi Arabia has shown significant improvements in the Doing Business ranking over the last five years, leaping from 67th in 2004, to 38th in 2006, to 16th in 2007, and to last year’s ranking of 13th. The Kingdom’s exceptional performance has been driven by the vision of Custodian of the Two Holy Mosques King Abdullah to modernize the Saudi business environment, thereby attracting greater participation from foreign investors in the economy of the Kingdom. He has encouraged domestic and foreign investment in the country by enacting a new foreign-investment law, establishing SAGIA, ascending to the World Trade Organization and taking the necessary steps to reform the judicial system so as to put in place effective commercial courts systems.

FDI is also seen as an important source of new jobs. Policy initiatives have been used to deliberately channel FDI into more labor-intensive sectors, thereby reducing the historical role of public sector jobs.

According to the NCB Capital report, FDI projects in Saudi Arabia are estimated to employ 375,000 people — 27 percent of them Saudis — and generate salaries of $7.8 billion.

“As investors entered 2011 in a relatively bullish mood, there is vast opportunity for global investors to keep Saudi Arabia on their investment radar, as it offers major opportunities in various sectors,” said Faisal H. Alsayrafi, managing director and CEO of the Financial Transaction House.

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