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Saudi Arabia’s main objective in attracting foreign investment is to unlock its labor force to develop goods and services that can compete globally, marking a shift for a kingdom known as a source of long-term capital for western companies.
The world’s biggest oil exporter is now past the midway point of a 14-year economic transformation strategy called Vision 2030. The goal is to diversify the economy and “detach ourselves from having to need to rely on oil flow,” Saudi Minister of Economy and Planning Faisal Alibrahim said in an interview. The kingdom has flipped the non-oil sector’s contribution to GDP to slightly over half the economy for the first time, up from 46% before the plan was announced in 2016. “The job is not done,” he said. “It’s on track. It’s gaining momentum.”
Key to sustaining this progress is attracting foreign companies and capital. That track record so far has been mixed.
Saudi Arabia aims to bring in $100 billion in foreign direct investment (FDI) annually by 2030, or 5.7% of GDP. FDI inflows for the first nine months of 2024 totaled $14.5 billion, just over halfway to the government’s $29 billion target for the year, according to the General Authority for Statistics. Alibrahim said the kingdom is “becoming net importers of capital gradually. Since the launch of the national investment strategy, we’ve been hitting our targets.”
The country has exceeded its goal in getting foreign companies to establish regional headquarters. Saudi’s investment minister recently said 571 international firms received licenses to move to Saudi — most chose to open offices in the King Abdullah Financial Center in Riyadh. Goldman Sachs, Citi, Morgan Stanley, among others, have all established a regional headquarters, which is required to do business with the Saudi government and the almost $1 trillion Public Investment Fund.
Alibrahim said the long-term nature of Vision 2030, and plans that extend beyond that, are creating opportunities “like no other elsewhere around the world. Naturally that is going to draw in the right kind of capital.”
By focusing on manufacturing, artificial intelligence, and knowledge transfer, Saudi Arabia aims to “develop things that can be services or goods that compete in external markets” and give the country “an advantage.”
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High-value industries are a main focus for the economy minister. The kingdom aims to become a major player in AI, not just as a consumer but as a creator of technology with value-added contributions, he said.
Beyond tech, the broader restructuring of the economy is reducing Saudi Arabia’s historical dependence on oil revenues. “That relation between revenue and oil commodity price is being disrupted. And then the relation between economic activity and what the government spends is being disrupted,” Alibrahim said. “Gradually we’re detaching.”
Crucial to maintaining non-oil growth is boosting private business, both local and foreign. Riyadh has set a target for the private sector to contribute 65% of GDP, Alibrahim said. The “business environment has been improving, policy predictability has been improving, institutional clarity has been improving, but we still want to do more.”
Mohammed’s view
It’s undeniable that there’s excitement and momentum surrounding Saudi Arabia’s economic transformation. Opening a headquarters there is a straightforward decision: It’s the Gulf’s biggest economy with enormous growth potential, and an average age of 29. The PIF’s well-documented investments in sports, live entertainment, and real-estate development are being made largely at home.
There are liveability issues, which are being addressed — but life in Riyadh is still not as attractive as its Gulf peers. The bigger question is whether Saudi Arabia has the cash to execute its vision. The state and PIF have room to borrow and are tapping debt markets, but there are questions about how long the country can sustain its investment plan while cutting oil output to support crude prices. The math doesn’t work with relatively low oil prices — something US President Donald Trump, who claims to be a friend of Saudi Arabia, demands.
At Davos last week, Saudi officials were active participants, and their western bankers and industrial partners were publicly effusive in their praise of Vision 2030. However, stalled FDI figures suggest there is not yet a complete buy-in.
Room for Disagreement
Saudi Arabia has largely absorbed the shock of lower oil revenue, with GDP growing for the past two quarters after a year of contraction. The economy expanded by 4.4% in the fourth quarter — the fastest pace in two years — driven by non-oil sector growth, according to data from the Saudi General Authority for Statistics released on Thursday.
Foreign firms are establishing a presence in the kingdom, and senior executives are moving there for tax advantages and a cushy lifestyle. Beyond the high-profile investments in sports and futuristic cities, industrial companies — both local and foreign — pumped 142 billion riyals ($37.9 billion) in manufacturing during the first three quarters of 2024, according to the investment minister, who described the sector as “the heart of Vision 2030.”
Notable
- The PIF began screening firms for headquarter licenses, causing anxiety among bankers seeking to work with the fund, Bloomberg reports.
- Industrial companies are eager to comply, while banks prefer Dubai’s offshore setup, according to The Financial Times.