Successfully investing in Saudi Arabia

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published on 15 June 2022 | reading time approx. 3 minutes


 

How do you assess the current economic situation in Saudi Arabia?

Saudi-Arabia is the largest economy in the MENA-region. Since the announcement of the “Saudi Vision 2030” in 2016, there has been an economic transition as the Kingdom has diversified the sources and the sectors of its economy due to the different forms of the country's wealth, including tourism, economic and others. 
  
In the first quarter of 2022 the GDP grew at the fastest pace in more than a decade. This is based on the oil production that rose to the highest level since fourth quarter of 2018. High oil prices have improved the external and fiscal balances and will most likely continue to do so. Growth is anticipated to accelerate to 7 per cent in 2022 before stabilizing at 3.8 and 3.0 per cent in 2023 and 2024, respectively. The nonoil sector decelerated somewhat, probably due to the impact of the Omicron variant on the global economy. Activity is forecast to stay strong in the 2nd quarter. 
   

How would you describe the investment climate in Saudi Arabia? Which sectors offer the largest potential? 

Due to the Vision 2030 the development of new economic sectors, including logistics, health, education, infrastructure, entertainment, clean energy, defense, tourism, and mining is strengthened. This is intended to diversify the Saudi economy away from its reliance on oil as well as to create more private-sector jobs for a young and growing population. To meet these goals, the Saudi Arabian government has made efforts by taking further steps to improve the country's investment climate to attract foreign investors and to attract greater domestic and international private sector participation in its economy. 
  
There have been labor law reforms in 2021 that are aimed at increasing employee mobility. The resolution allows foreign employees to leave their jobs without the consent of the employer. In addition, since 2015, retail and wholesale businesses can be 100 per cent foreign-owned. The country ranks 62nd out of 190 countries on the World Bank’s 2020 Doing Business index and belongs to the 10 economies that improved the most on the ease of doing business after implementing regulatory reforms. Starting a business is now easier due to the establishment of a one stop shop that combines several pre- and post-registration procedures (ibid). Saudi Arabia has made it easier to deal with construction permits by introducing an online platform and allowing civil defense to approve permits after they have been issued (ibid). The country facilitated imports and exports by expanding its electronic trade portal, enabling risk-based inspections, establishing an online platform for certifying imported goods, and improving infrastructure at the Port of Jeddah (ibid). Investment opportunities therefore exist for entrepreneurs. Small and medium-sized enterprises currently account for one-fifth of national GDP. By 2030, however, this figure is supposed to amount to 35 per cent. 
  

What challenges do German companies face during their business ventures into Saudi Arabia? 

Foreign investments are prohibited in certain sectors that are on the Negative List of the foreign direct investment law. In the industrial sector exploration, prospecting and production of petroleum substances, excluding services related to the mining area, are currently restricted to foreign interests. In the service sector activities like catering to military sectors, security and detective services, real estate investment in Mecca and Medina, tourist orientation and guidance services related to Hajj and Umrah or fisheries are closed for foreign investors (ibid) as such activities require either Saudi partner or shall be fully owned by Saudi national. 
 
In some areas only partial foreign ownership is allowed so that foreign investors need to partner with a Saudi national shareholder who will hold a specified minimum percentage of the share capital in the company). How high this percentage is depends on the sector (ibid). For example, at the moment 40 per cent of shares in insurance businesses must be held by a Saudi national or nationals (ibid). 
 
Moreover, foreign investors who want to invest in Saudi companies need to apply for a foreign investment license issued by the Ministry of Investment of Saudi Arabia (MISA) (ibid). Businesses also have to apply for a commercial registrations (ibid). Depending on the sector licenses and approval from other authorities are also needed (ibid). 
 
The Saudisation program aims to increase the percentage of Saudi local employees and reduce the rate of foreign employees. A foreign employee can only be hired if no equally suitable Saudi employee is available. In 2011 the current Minister of Labour decided to implement the so-called Nitaquat-System that supports the Saudi nationalism scheme. However, Saudization quotas will not apply to companies which choose to set up or relocate their headquarters in Saudi Arabia). 
  

What significance will renewable energies – like solar energy – have for Saudi Arabia, the world's biggest exporter of crude oils? What influence does this change in energy politics have on foreign investors?

Renewable energies made up just 0.02 per cent of Saudi Arabia’s final energy consumption in 2017). Saudi Arabia plans to generate 50 per cent of its energy from renewable sources by 2030 (ibid). The majority of renewable energy will come from solar power generated by huge farms in the desert (ibid). On November 10, 2021 Saudi Arabia's energy minister announced that the kingdom plans to invest 380 billion riyals (101 billion US-dollar) in renewable energy projects and a further 142 billion riyals in energy distribution through 2030. In the latest MESIA report, released in January 2022, Saudi-Arabia was listed as one of the world’s booming markets in the renewable-energy sector, bringing more investors and developers to participate in huge projects than any other. 
   
By 2030, Saudi Arabia wants to build the future metropolis of Neom city in the northeast of the desert state, between Egypt, the Red Sea and Jordan. It is to cover an area of 25,000 square kilometers, making it 32 times the size of New York City. The city is to be powered 100 per cent by renewable energies like solar power, wind energy and green hydrogen. 
  
Authorities in Saudi-Arabia are planning several other projects in areas such as the Red Sea, Madinah, Qurayyat, Jeddah and Wadi Al-Dawasir to help reach the national target of net-zero emissions by 2060. 
  

In your opinion, how will Saudi Arabia develop? 

Due to the many reforms in recent years, as well as those expected in the near future to fulfill the Saudi Vision 2030, Saudi Arabia will be an increasingly important business location in the Middle East in the future. The country will attract more and more foreign investors, companies and employees in the nonoil sector.

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Tarek Antaki

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