Riyadh finally seems to be stepping up the pace of economic reform. Foreign investors are to be allowed much greater access to the Tadawul All Share Index (TASI) and will be invited to play a leading role in developing planned industrial projects. The government is seeking foreign investment in order to create much needed employment for its young population but also in order to sustain strong economic growth. Rising oil production has driven economic growth in recent years but the private sector is expected to take the lead over the next two years.
Unlike in many other parts of the world, Saudi Arabia is not seeking to attract mass manufacturing investment. Rather, it will focus on high value, highly-capital intensive industries, many of which will be able to make use of the country’s modern infrastructure and plentiful oil and gas supplies. In a recent report, Kuwaiti asset management firm Markaz stated: “New sectors such as automotive are expected to receive government support which – in turn – are expected to nourish ancillary activity across related sectors. Strong non-oil growth should receive additional support from recent labour market reforms, which had the effect of reducing unemployment.”
Riyadh hopes to attract massive foreign investment in the new King Abdullah Economic City (KAEC). Modelled on similar projects in China, UAE-based developer Emaar Properties aims to develop KAEC as an industrial city in a desert area of 168 square meters on the Red Sea coast. The centrepiece of the venture will be a new port, which investors can use to export industrial and manufactured cargo. Companies already committed to investing in the new city include Total and Pfizer.
In July, the government agreed to allow direct foreign investment in companies listed on the TASI from 2015. Foreign investors must have a minimum five-year operating history and at least $5 billion-worth of assets under management, while there is likely to be a cap on the level of foreign investment in each company. At present, only citizens based in one of the other Gulf Cooperation Council (GCC) states can freely trade in Saudi stocks; other investors are limited to more complicated transactions, such as equity swaps, and this restriction has kept many global funds out of the country. The Kingdom still has the tightest restrictions on foreign investment of any member of the G20.
The move had been mooted for several years but had been repeatedly delayed. However, the government now seems keen to take steps towardseconomic liberalization and diversification. The TASI is valued at about the same size as all other Gulf bourses put together and although it is not a big stock market by global standards, international access may help to drive up prices in the long term and thereby encourage the government to list new firms.
In October, the Saudi Arabian General Investment Authority (SAGIA) sought to quash rumours it was planning to limit the number of foreign investment licences it issues to 100 a year. The SAGIA director of communications, Nasser Al Tawayan, said: “It is not logical for SAGIA to adopt such a trend since it is incompatible with the basic principles underlying the economic policy of the kingdom…The Saudi Arabian investment market is considered to be the most open and advanced in the region. The law clearly stipulates that the doors of foreign investment are open in all sectors and activities with the exception of those activities excluded from foreign investment in accordance with the decisions of the Supreme Economic Council.”
This story was published in full in The Middle East (TME) printed edition of November 2014