Determination of FDI in Saudi

Determination of FDI in Saudi Arabia

Saudi Arabia and Foreign Direct Investment (FDI)

Saudi Arabia, because of the dependence of its economy upon oil for sustenance, has often been called a rentier state, as noted in a 2005 overview by the Suburban Emergency Management Project (What is a rentier state, 2005, SEMP). Yates (1996) as well as the CIA Factbook (2010) note that the monarchial leadership owns the oil-rich territory of the land, and uses its profits derived from oil wealth to use as it seems fit, often to advance a highly conservative religious social policy, consistent with the faith of its leaders even while it pursues a modern, forward-thinking economic approach to the non-Islamic world (Saudi Arabia, 2010, CIA Factbook). Western nations have been much criticized, as noted in a 2007 New York Sun Editorial, for being loath to challenge Saudi Arabia, given the tremendous power it wields, as a result of its command of oil wealth (Ibrahim 2007). According to the Australian Government's E. Saudi Arabia has the world's largest oil reserves, production facilities and export ratios and the world's largest surplus oil production capacity which, as the oil market's "swing producer" enables it to have greater control over the international price of the commodity (Saudi Arabia, 2009, EFIC). It is one of the leading members of OPEC, the international cartel of most of the oil-producing nations of the world (OPEC, 2010, Investor Words).

A study by the Export Finance & Insurance Corporation (2009) found that the oil sector accounts for 50% of Saudi Arabia's total GDP, 90% of its exports and 75% of its source of government revenues. "The sector's volatility and size means it is hard to shield the economy from the oil price cycle, and so the economy has a pronounced business cycle geared to the oil one. Partly reflecting the rise in oil prices since 2002, GDP growth has averaged around 5%, compared to a modest 2.9% a year over the last 15 years…per capita income has risen to almost U.S.$20,000, after being broadly flat in the 1990s" (Saudi Arabia, 2009, EFIC). But Saudi Arabia, although always trying to gain a high price for oil (in 2009, it declared $80 per barrel to be a 'fair price') has tried to reach out to the West. The monarchy knows that greater economic diversification is essential to shield itself from the capricious nature of the oil-driven business cycle, to gain respect for itself as a nation, and is also aware that oil reserves are finite, notes Ali (2010).

Unlike many of its Arab neighbors, Export Finance & Insurance Corporation found in a comparative 2009 study that Saudi Arabia has made a concerted effort to liberate itself from total dependence upon oil. One method Saudi Arabia has used is soliciting foreign direct investment (FDI). The Saudi monarchy has solicited foreign investment in sectors of the economy it believes are necessary to build to a more functional and independent state, such as insurance, wholesale and retail trade, air and train transportation, and communication services. However, thus far its most successful ventures have been concentrated on energy-intensive petrochemical manufacturing and aluminum smelting, which obviously tap into the kingdom's natural resources rather than fundamentally grow another segment of the economy (Saudi Arabia, 2009, EFIC).

Overall, its efforts to attract FDI seem to be working: Ghafour and RAfique (2007) in a study for the Arab News noted that in 2005, Saudi Arabia became largest recipient of foreign direct investment (FDI) in the Arab world. In 2006, it received $18 billion in FDI, an increase of 51% over 2005, according to a report of the United Nations Conference on Trade and Development (UNCTAD) (Ghafour & Rafique 2007). The goal of the Saudi Arabian General Investment Authority (SAGIA) is to make the nation one of the top ten nations in attracting foreign investment, not simply in the region, but in the world. The Kingdom of Saudi Arabia has also created six new economic zone cities, specifically designed to attract foreign investment. The government has set a goal is for these six cities to provide 20% of the nations' GDP by 2020 (Saudi Arabia, 2009, EFIC).

Ghafour and Rafique (2007) also found that inflows of FDI increased from $2 billion to $18 billion from 2005-2007, illustrating the nation's apparent success in heading towards its stated goal (Ghafour & Rafique 2007). "Foreign trade (imports plus exports) was 106% of GDP in 2008, up from 65% in the 1990s. Foreign direct investment has also risen strongly, accounting for 30% of investment in 2007, compared to just 1% in the 1990s," indicating the "growing acceptance among the authorities that foreign companies can support development of the non-oil sector" (Saudi Arabia, 2009, EFIC). Also making Saudi Arabia attractive to investors is the fact that the Saudi currency, the riyal, is extremely stable as it is "pegged to the U.S. dollar," and the fact that "there are no restrictions on remittances of profits, loan repayments or repatriation of capital" (Saudi Arabia, 2009, EFIC). This stands in notable contrast to Beblawi (1987) analysis of the nation's dependent on self-inclosed sources of revenue.

Despite understandable political concerns regarding Islamic extremism in the region, overall, the country has secured a high investment grade sovereign risk rating from the International Monetary Fund. The IMF (2010) has called the Saudi government's management of its oil wealth 'prudent' and "for long-term foreign currency bond risk, both Standard & Poor's and Fitch rate it AA-, Moody's Aa3," three notches below AAA (Saudi Arabia, 2009, EFIC). Low public debt and growth of foreign assets underline its willingness to abide by Western-style economic restraint, and also suggests that ties to the West will guard against any extreme and destabilizing policies. The Saudi government, mindful of how spikes in oil prices can be transient, have also shown caution that meets with the approval of foreign investment in its approach to oil windfalls: "After saving 75% of the windfall from 2002-2008 oil price rise, the central bank has net foreign assets worth a mammoth U.S.$440 [billion], equivalent to 93% of GDP" (Saudi Arabia, 2009, EFIC).