Saudi: Why Is So Much Money Leaving The Country?

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The Saudi government is still failing to attract significant levels of foreign investment into its economy while also proving unable (or unwilling) to stem the flow of money leaving the country, according to the latest data and analysis.

During the summer it emerged that the kingdom – which needs foreign investment to fund the government’s ambitious economic reform agenda – had suffered a shock collapse in inward investment over the past year. According to a report from the UN Conference on Trade and Development published on June 7, net foreign direct investment (FDI) fell to just $1.4bn in 2017, down from $7.5bn the year before.

Since then, there has been no sign of things improving. According to London-based consultancy Capital Economics, capital outflows from Saudi Arabia have continued at a high level this year. In a report released on September 20, it said net capital outflows were running at approximately 5% of gross domestic product (GDP) in the first quarter of this year, compared to less than 2% of GDP in late 2016.

There are a number of reasons that might explain the trend. One relatively benign explanation is that the Saudi government has been moving money abroad to make investments.

That was the explanation recently offered by Ayman bin Mohammed al-Sayari, deputy governor for investment at the Saudi Arabian Monetary Authority (Sama), the country’s central bank. Speaking at a press conference on September 16, he said “A lot of the capital flows or at least a considerable portion of that…figure was merely some other institutional investors, quasi-sovereign, who have elected to…invest more internationally than locally.”

The most prominent Saudi investor is the state-owned Public Investment Fund (PIF), which is being used by the powerful Crown Prince Mohammed bin Salman to drive forward his economic reform agenda, Vision 2030.

These days the PIF’s portfolio includes sakes in dozens of companies, ranging from industrial giant ArcelorMittal to ride-hailing app Uber. It’s most recent high-profile deal was a $1bn investment in U.S. electric car maker Lucid Motors to help the firm prepare to launch its first vehicle, the Lucid Air, in 2020.

However, there are other trends at play which are likely to be of greater concern to the authorities in Riyadh.

Jason Tuvey, senior emerging markets economist at Capital Economics, notes that “there has been a further slowdown in foreign direct investment into Saudi Arabia… The government has made concerted efforts in recent years, as part of the Vision 2030 reforms, to attract more direct investment to the kingdom. But, so far at least, these have failed to bear fruit.”

He says that FDI inflows have fallen from an average of around 1% of GDP in 2014-16 to just 0.3% of GDP in the first quarter of this year.

In addition, Saudi residents appear to be moving more of their own money abroad. Net investment outflows from the banking sector were running at more than 5% of GDP in the first quarter of this year, compared to net inflows of around 1% of GDP in 2016. “The main driver behind this has been a jump in Saudi residents placing banking deposits abroad,” says Tuvey.

The reasons for this movement of money are hard to know for sure, but it is not unreasonable to think wealthy Saudis are looking overseas for a safe haven for their assets, after the crown prince had several hundred royal family members and senior business executives and government officials arrested in November last year in what was billed as an anti-corruption drive.

It’s not all bad news these days. The Saudi economy – and, by extension, the government’s finances – has benefitted from rising oil prices this year. Brent crude has been trading in a range of $70-80 a barrel since April, a level not sustained since 2014. That rise has been caused in no small part by the potential loss of Iranian oil supplies from the international market as a result of U.S. sanctions on Tehran.

However, some observers expect the market to settle down and prices to fall back over the next year or so. If that happens it could force the Saudi government to start drawing down more of its foreign exchange reserves and could also put pressure on the Saudi riyal and its peg to the U.S. dollar.

Tuvey suggests that, if the riyal does indeed come under pressure, the government could order the PIF to change its approach and slow down its international investment drive. However, Riyadh has far less control over what Saudi citizens and international businesses decide to do with their own money.

“We suspect that the government would force the PIF to slow its foreign investments if significant strains emerged,” says Tuvey. “A greater concern would be if lower oil prices triggered a pick-up in private capital outflows.” _ Forbes

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