|21 May, 2020

Saudi FDI outlook: COVID-19 pulls down economy, global investors remain positive

The first quarter of 2020 was Saudi Arabia's strongest period for investor interest in ten years

General view of Riyadh city, after the Saudi government eased a curfew, following the outbreak of the coronavirus disease (COVID-19), in Riyadh, Saudi Arabia, May 7, 2020. Image for illustrative purposes

General view of Riyadh city, after the Saudi government eased a curfew, following the outbreak of the coronavirus disease (COVID-19), in Riyadh, Saudi Arabia, May 7, 2020. Image for illustrative purposes

REUTERS/Ahmed Yosri

If the effects of COVID-19 and lower oil prices continue, Saudi Arabia's foreign investment landscape could take a beating going forward. As the kingdom strives to emerge resilient through the pandemic, the Ministry of Investment of Saudi Arabia (MISA) reported that 348 new international companies were granted licenses to operate in the Saudi market in Q1 2020.

The latest numbers mark a 19 percent annual increase compared to the same period in 2019, and a 20 percent quarter-on-quarter increase from the final three months of 2019. Month-to-month growth began to slow in March as global markets reacted to the impact of the COVID-19 pandemic, MISA said in its latest Investment Highlights report. 

The Q1 2020 figures indicate that global investors remain positive about the long-term potential of the Kingdom as an investment destination as economies transition to post-COVID-19 conditions, it said.

While the first quarter was Saudi Arabia’s strongest period for investor interest in ten years, the economic effects of COVID-19 began to be felt worldwide towards the end of this period.

Khalid Al Falih, Minister of Investment, said: "January and February saw strong momentum, but growth began to slow in March with 101 new licenses compared to 126 and 121 granted in the first two months of the quarter respectively."

"Despite the cautious nature of economic activity, we can see that 73 percent of all new investments in Q1 2020 were for full foreign ownership and 27 percent were joint ventures with local Saudi partners,” he added.

The virus first appeared in Saudi Arabia in the eastern city of Qatif. Over the course of March, it spread to the rest of kingdom, with Makkah now accounting for the highest number of cases, followed by Riyadh and Jeddah respectively. As of May 20, the Kingdom has reported 62,545 cases of the coronavirus and 339 deaths.

According to MISA, several deals signed since the beginning of the pandemic indicate that the global business community remains positive about the long-term potential and resilience of Saudi Arabia as an investment destination.

New agreements include a joint-venture partnership between a Saudi company and South Korean petrochemicals firm and the announcement of a new shipping line connecting Saudi Arabia to East Africa.

As in 2019, growth came from long-standing strategic partners such as the United States and United Kingdom, with 37 US companies and 32 UK companies awarded licenses in Q1 2020.

India (41), Lebanon (33), and Egypt (26) were among the five leading countries for new international companies. China was the 9th biggest investor with 11 licenses.

Source: Invest Saudi

Quarter-to-quarter sector growth was also seen across a selection of emerging industries, such as ICT, retail and e-commerce, and tourism, culture and entertainment.

Saudi government entities have implemented numerous stimulus packages and funding relief programs for the private sector worth $45 billion, aimed at helping the kingdom’s local and international businesses, and citizens and residents, to mitigate both the immediate and long-term impacts of COVID-19.

On 11 May, the Ministry of Finance of Saudi Arabia (A1 negative) announced several fiscal measures to reduce its budget deficit, which results from the decline in oil prices. The measures include the 1 June cancellation of the cost of living allowance for eligible Saudi nationals and the 1 July increase of value-added tax (VAT) to 15 percent from 5 percent.

Pandemic economic Impact

While predictions at the start of the year put Saudi’s economic growth rate at 2.2 percent for 2020, the national growth forecasts are now influenced by several factors such as the impact of the containment measures on non-oil growth and the impact of oil price volatility on the oil sector.

In the first week of May, Moody's Investors Service cut Saudi Arabia's outlook to 'negative' from 'stable', citing higher fiscal risks for the kingdom due to the crash in oil prices, and uncertainty about its ability to offset the oil revenue losses and stabilize its debt in the medium term.

However, the global ratings agency affirmed sovereign credit rating at 'A1', citing the government’s “still relatively robust, albeit deteriorating” balance sheet, moderate debt level and substantial fiscal and external liquidity buffers.

According to the report from MISA, the 24/7 lockdown across the country’s major cities, temporary suspension of haj and umrah pilgrimage  and international and domestic flight closure will add to economic impact triggered by containment measures.

Were the haj to be scrapped this year, or at least massively reduced in scale, it would deal a devastating to blow to the tourism sector.

“Expanding tourism - religious and secular - is a key part of Saudi’s plans to reduce its reliance on hydrocarbons,” said Monica Malik, Chief Economist at Abu Dhabi Commercial Bank had told Zawya. “Now with lower oil prices, we can expect to see slower progress in building of new tourism infrastructure, but religious pilgrims have always been the key driver of tourism and demand for associated services.”

On the FDI front, while Saudi Arabia experienced consistent foreign investment growth over the past three years, highlighted by a 7 percent annual growth rate in 2019, 2020 will likely be a challenging year. UNCTAD predicts global FDI will fall to its lowest level in two decades this year, with downward pressure of up to -40 percent.

Positive trends

What should not be ignored is that COVID-19 has also led to some positive behaviors and market trends in Saudi Arabia, with rapid growth experienced in a number of digital industries.

The trends include:  A shift in consumer behavior towards e-commerce, with 95 percent of Saudi consumers increasing their online shopping, according to a recent Kearney Middle East survey; A move towards cashless payments in line with the Vision 2030 target of reaching a 70 percent share in cashless transactions; A rise in the use of food delivery apps, with a corresponding positive impact for the F&B, retail, and B2C logistics sectors.

Data recently released by the Saudi Payments Company, a SAMA subsidiary managing the national payments infrastructure, shows a clear spike in March for online payments. Online sales in March hit $450 million while online transactions for the same month stood at 7.3 million.

(Reporting by Seban Scaria, editing by Anoop Menon)

seban.scaria@refinitiv.com

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