Continuing the momentum that was witnessed in 2019, the number of foreign investment licenses in Saudi Arabia grew to 348 in Q1 2020. This marks a year-on-year increase of 19 percent and reflects the growing appetite foreign institutions have in the Saudi market. The Kingdom’s transparent regulatory transformation over the last few years caught the attention of both global multinationals and small to medium enterprises alike. Furthermore, the Kingdom’s economic resurgence in 2018 and 2019, which was led by stronger oil revenues and a burgeoning non-oil economy provided foreign investors with needed assurances to bolster their investments positions.
Full ownership investments accounted for 73 percent of the new foreign investments while joint ventures with local partners accounted for the remaining 27 percent. This represents a major shift from just a few years ago when joint ventures were the only legal option for foreign enterprises. The sectors that attracted the highest number of foreign licenses were emerging sectors, manufacturing, and telecom and IT with 125, 69, and 46 licenses granted, respectively. Notably, the United States registered the second highest number of foreign investors with 37. Other countries with the highest number of foreign investments were India, Lebanon, and the U.K. with 41, 33, and 32 licenses granted, respectively.
The emergence of COVID-19 and its impact on the global economy has significantly slowed the flow of global investments, especially to emerging markets. Disruptions in global supply chains, imposed government lockdowns, and the fear of an uncontrollable spread of the coronavirus has dampened, if not halted the way global economies operate. According to the OECD, FDI inflows are expected to fall by more than 30 percent in 2020 and this is under its optimistic scenario. Under these circumstances, Saudi Arabia is not alone as the entire globe is combating the negative effects of the pandemic. Saudi Arabia is further challenged as demand for oil has significantly decreased. A healthy hydrocarbon market is essential for Saudi Arabia to continue to attract FDI. The government was swift to institute fiscal reforms to address the pandemic as it earmarked over SAR270 billion worth of support to the private sector across all sectors with an emphasis on supporting SME’s. The steps taken to minimize the negative impact on the economy, which include stabilizing oil markets bode well moving forward.
The OECD has stated that global FDI flows have steadily declined over the last five years with the potential continuation of this trend into 2021. While FDI flows may have been declining, it must be noted that the Saudi Arabia’s FDI inflows in 2019 and into Q1’20 was an exception. Prudent policies that included the introduction of the bankruptcy laws, government tender and procurement law, new competition law, and the upcoming private sector participation law were driving forces in providing assurances to international investors. Furthermore, incorporating the Tadawul into the MSCI, FTSE, and S&P Dow Jones emerging markets indices reflects the confidence the global equity investment community has placed in the Kingdom.
With the slowdown in global flows of FDI expected to stay in place for the rest of 2020 and possibly into 2021, economies will face growing challenges to attract the attention of foreign investors. Nonetheless, the Kingdom was embarking on the path of resurging FDI inflows prior to the pandemic and is poised to reinvigorate investor appetite once the global economy climbs out of this catastrophic event.