The impact of stability on FDI growth in Saudi Arabia
As geopolitical tensions, weakening global demand, and tighter monetary and fiscal policies continue to pressure global trade, some economists predict a macroeconomic recession. Yet, Saudi Arabia remains among the fastest growing economies in 2023, due to economic stability. In the following, we will explore some of the impacts of stability in the Kingdom on the economy and on Foreign Direct Investment (FDI).
Brief overview of the global economy
With global trade remaining under pressure, the volume of global trade in goods and services is forecast to grow by 2.3 per cent in 2024. Economists expect a macroeconomic recession beginning late 2023 and persisting throughout Q1 of 2024. Meanwhile, U.S. strategists expect a meaningful recession during Q4 of 2023 and a significant recovery in 2024. Strategists estimate that falling inflation could influence margins and that economists are overly optimistic about the positive impacts of AI.
The Kingdom of Saudi Arabia’s Gross Domestic Product (GDP) advanced by 3.8 percent in Q1 of 2023, compared to a 3.9 percent growth in the preliminary reading and after a 5.5 percent rise in Q4 of 2022. The decline in growth is attributed to decline in crude oil prices in Q1 of 2023, as a result of global economic slowdown.
Prospects in KSA
The Saudi economy is set to grow respectively by 3.3 and 2.5 percent in 2024 and 2025 as mentioned in a report recently issued by the World Bank. The report pointed out government investments and continued support to Service sector as key factors driving economic growth. It is worth noting that the economic cycle in the Kingdom of Saudi Arabia depends on oil prices fluctuations. The Kingdom is globally ranked the largest exporter of crude oil, with profits accounting approximately 87 percent of government revenue.
Furthermore, non-oil sector in the Kingdom is growing at its fastest rate in less than a year. Real GDP growth is expected to reach 2.9 percent in 2023. Recently, Saudi Arabia’s economy is projected to grow at a higher rate than expected by the Saudi Council of Economic and Development Affairs.
Unemployment rate among Saudi nationals is yet another key factor assuring stability in the Kingdom. The rate dropped to its lowest level since first recorded in 1991. It dropped from 9.9 percent in 2022 to 8 percent in Q4 of 2022, according to the Labor Force Survey by the General Authority for Statistics. This impressive decrease is coupled by the double effect of decrease in labor force participation and employment growth at the same time. In addition, more than 200,000 housing units were built over the last five years. Actual government expenditures during the second plan reached US$200 billion, about 40 percent above the planned figure and almost ten times the level of the first plan.
Saudi Arabia has been keen on attracting FDI and improving stability. It implemented over 600 economic reforms since launching its national strategy, Vision 2030, to attract SR12.4 trillion ($3.3 trillion) of cumulative investment and SR1.8 trillion in Foreign Direct Investment inflows between 2021 and 2030 as part of the National Investment Strategy. the Kingdom achieved an 18 percent increase in FDI in 2020, even as the global FDI declined by 35 percent due to the pandemic.
As one of the fastest growing economies in the world, the Kingdom ranked ahead 22 countries in May 2022 Ipsos’ Global Consumer Confidence Index. The Kingdom also accounts now the fastest-growing nation among the Group of Twenty (G20), as per World Economic Outlook 2022 (by the International Monetary Fund), with a growth rate of 7.6 percent. Additionally, the Industrial Production Index (IPI) increased by 24 percent year in May 2022, with manufacturing growing by over 28 percent.
As for FDI flows in 2021, they increased by 257 percent compared to 2020 following Aramco’s SR46.5 billion infrastructure deal closed with an international investor consortium in Q2 2021. FDI flows in Q1 of 2022 increased by 10 percent to SR7.4 billion compared to the same period of the last year.
As one of the fastest growing economies in the world, the Kingdom ranked ahead 22 countries in the May 2022 Ipsos’ Global Consumer Confidence Index. Also, citing the International Monetary Fund’s World Economic Outlook 2022, The Kingdom is now the fastest-growing nation among the Group of 20 countries, with a growth rate of 7.6 percent. Additionally, there is a rise in Industrial Production Index, “The IPI expanded by 24 percent year on year in May 2022, with manufacturing growing by over 28 percent. These result from the government’s active diversification efforts.
As the Kingdom pursues its efforts to enhance stability and investment climate, it is expected to become one of the world’s most competitive economies and attractive investment destinations by 2030. In this scope, the volume of digital transactions is rising, in line with the government’s strategy aiming to digitize 70 percent of all transactions by 2025.
Finally, seeking to diversify its economy away from oil dependence, the Kingdom is building on tourism to soon become one of the prime fields contributing to its economy. The number of promised jobs in the sector is almost 1 million opportunities, and over 3,500 tourism investment licenses are already issued.. a significant leap towards achieving 10 percent of the national GDP by 2030. The Kingdom is now expected to welcome over 100 million tourists by 2030, with “SAUDIA” (the Kingdom’s flag carrier) adding 94 new destinations to its travel map.
-
Abdelrahim ElbakheitInternational Tax Expert