JEDDAH, 13 March 2006 — No doubt Saudi Arabia and the other Gulf countries are experiencing an economic boom that is attracting local and foreign investments whether in industry, real estate or services sector. According to the Saudi Arabian General Investment Authority (SAGIA), foreign investments in the Kingdom has increased 30-folds last year from the year before, an indication of the strong and viable investment environment in the Kingdom. However, some concerns remain about having the appropriate standard of infrastructure to accommodate the influx of projects, having reliable laws and regulations and about attracting the right kinds of investment that would provide a sustainable source of income.
Saudi Arabia has launched a plan that would expand its industrial base and diversify its productions. According to the World Investment Report of 2005 by the United Nations Conference for Commerce and Development, Saudi Arabia received $1.867 billion in foreign direct investment in 2004, more than twice as much as the second highest country to receive FDI in the Gulf which is United Arab Emirate. The King Abdullah Economic City by itself is a huge undertaking that opened up a wide variety of investment opportunities such as construction, power and technology. To attract foreign investment, the Kingdom would be offering different kinds of incentives including a tax credit formula for investments in less developed regions, a re-export zone and more streamlined processing. Analysts have pointed out that several other changes and improvements need to be made to be able to compete in attracting local and foreign investments with neighboring countries regarding such things as transparency, access to information, labor laws, bureaucracy and undefined commercial laws and regulations. SAGIA already began coordinating with the various ministries such as justice, commerce and labor in addressing these obstacles.
Investment is considered part of the gross domestic product (GDP) and it depends on providing national resources, ease of foreign capital flow and providing the appropriate economic environment such as infrastructure, attractive laws and political stability. According to the Gulf Organization for Industrial Consulting (GOIC), private resources become more feasible if they were transferred into sources for funding projects that are more proficient in increasing GDP. In addition, competent capital markets and other factors also play a role in determining the size of finances allocated for investment. In the past few years, there has been high liquidity in the Gulf due to the high oil prices, repatriation of money post 9/11, improvement in regional stability and structural reforms. Diversifying the economic base and finding alternative sources of income, which has been mostly oil, has become an objective for the Gulf countries and most of them have made positive steps toward that, but the focus has been mainly on the services sector, according to the latest report by GOIC.
Due to the high liquidity, GCC countries are witnessing a surge in specific investments, namely real estate and stocks. According to numbers from the Arab Institute for Investment Security, investment estimates in construction and real estate would exceed $250 billion by the end of this decade. This sector represents 10 percent of GDP for the Gulf countries and the financing market for the real estate sector in the Gulf countries was around $750 billion this year reflecting the high demand for it, according to GOIC. However, the high prices of real estate in these countries are raising fears that this inflation would lead to a financial shock if there were any negative political developments in the region or if there was a crash in oil prices because the first to suffer from such a scenario is the financial sector which would loose loan returns and from the drop in the collateral value of real estate, reported GOIC. Backing this fear is the current disorganization and lack of stern procedures and transparency in to the real estate market in the Gulf countries, as was evidenced in Saudi Arabia recently with scams and seemingly unfeasible real estate projects which prompted many investors to flee the real estate market and pour their money in the stock market.
The high oil pieces since the end of 2005 has caused an economic flourish that helped many companies particularly in the financial, real estate and communication sectors in the Gulf to gain high profits, which was reflected in the increase in their stocks. According to Global Insight, the stock market in the GCC countries have risen in value tremendously to a combined total of around a trillion dollars in 2005. The boom was also assisted by economic reforms and privatization in creating new investment opportunities for the private sector. However, the Gulf stock markets still need more reforms, openness and transparency in order to be able to guide and privatize the financial resources towards the investments needed by the region.
Meanwhile, statistical indications reveal a slow pace in the industry sector compared to others, which reinforces the importance of guiding and encouraging the private sector to invest in industry, according to GOIC. The governments continue to dominate the industrial sector, especially the huge investments in petrochemical, gas and the industrial cities, with the private sector reluctant to enter investments that are slow in making a return and are administratively complicated. GOIC reports that among the total investments in factories in the GCC countries, which amounts to around $103 billion, more than 70 percent of these investments are in large factories for chemical products that are owned by the governments. The recent economic reforms are meant to bolster the role of the private sector and encourage its investment in the industrial sector especially the small and medium establishments. Achieving a competitive standard is important to makes profits, and foreign direct investment would help raise the production standards because it would raise the standards of resource management and it would transfer technology and knowledge. So far, the inflow of FDI is below expectations, according to the GOIC report.