Three years after the launch of Saudi Vision 2030, global investor confidence in the country remains mixed. Google, Blackstone, HSBC, and AMC Theatres are ramping up projects in Saudi Arabia, but the country is grappling with historically low levels of foreign direct investment. The frenzy over a $12 billion bond sale by Saudi Aramco was tempered by the subsequent news that the prices of all five slices of the bond issue dropped below their initial sale prices. Prominent businesspeople withdrew from the second Future Investment Initiative in October 2018 in the aftermath of the murder of Saudi journalist Jamal Khashoggi, fearing the reputational costs of conducting business inside Saudi Arabia or with its government. Yet a renewed vote of confidence in April by the chief executive of HSBC, John Flint, who said, “It’s a privilege to be back in Saudi Arabia,” at a conference in Riyadh, seems to reflect diminished anxieties on the part of the global business community.

Bond issuances and the Saudi stock exchange’s inclusion in major international indexes have boosted capital inflows to Saudi Arabia. However, many of these investments represent “hot money,” or capital that moves regularly and quickly between financial markets. Long-term government initiatives intended to symbolize the country’s economic transformation – such as the $200 billion privatization program and the Neom megaproject – depend on sustained financing from local and international investors, and it is not clear this level of support will be forthcoming. The “build it and they will come” strategy is not sufficient to attract the sustainable, long-term investments desperately needed in the kingdom. Such an approach did not produce commercially viable economic city megaprojects in the early 2000s, which the Vision 2030 program aims to address.

Rather, the economic components of Saudi Arabia’s ambitious transformation, in which local and foreign investments play a pivotal role, ultimately hinge on the government’s ability to improve the transparency of commercial processes. Focusing on three policy priorities can help in this effort: implementing clear and consistent commercial regulations; instituting safeguards against irresponsible business practices; and limiting state intervention in the economy. On these fronts, the government’s track record has been mixed.

Saudi government officials understand that some change is required to create a “thriving economy open for business” – one of the key themes of Vision 2030. Yet Saudi Arabia ranked 92 out of 190 countries in the World Bank’s ease of doing business index for 2018; the country ranked even lower, at 144, for starting a business. Saudi Arabia’s growth trajectory has not been a source for optimism: Annual real gross domestic product growth swung from a contraction of 0.7 percent in 2017 to growth of 2.2 percent in 2018. The International Monetary Fund predicts growth will hover around 2 percent in 2019. If Saudi Arabia hopes to diversify its economy, boost new strategic sectors, and privatize specific government services, the country will need the support of local and international investors.

Indeed, Saudi Arabia aims to boost foreign direct investment to 5.7 percent of GDP by 2030. For a sense of scale, achieving this target in 2018, when GDP reached $782.48 billion, would have required attracting around $44.6 billion in FDI. While historic FDI figures approached $40 billion earlier in the 2000s owing to rising oil prices and foreign investment reforms, FDI inflows decreased substantially after the 2008 financial crisis. Saudi Minister of Economy and Planning Mohammed Al-Tuwaijri noted that the kingdom’s FDI reached a mere $3.5 billion in 2018. This figure exceeds the 14-year low of $1.4 billion for 2017 but falls far short of the targets set by Vision 2030. The investment figures also place Saudi Arabia well behind its neighbor, the United Arab Emirates, which attracted $10.35 billion in FDI in 2017, as a regional investment hub.

Saudi Arabia: Foreign Direct Investment Flows (in billions of U.S. dollars)

Stronger regulatory frameworks in the commercial sphere are needed to attract hesitant investors. The Saudi government issued a royal decree in January promoting seven investment principles that stress the importance of incorporating transparency and equality into investment policies. The government also implemented a new bankruptcy law in August 2018 – a step toward clarifying the rights and obligations of investors when they encounter financial difficulties. The new law differentiates between bankruptcy and insolvency, details provisions for preventative settlements and financial restructuring, and establishes circumstances and procedures for liquidation.

The utility of the bankruptcy law, though, remains untested. Maan al-Sanea, the founder of debt-ridden Saad Group, is in the process of settling claims from bank creditors through the country’s new bankruptcy law. The Saad Group defaulted together with Ahmad Hamad al-Gosaibi and Brothers on nearly $22 billion of loans in 2009. However, a Saudi court rejected Ahmad Hamad al-Gosaibi and Brothers’ applications for both a protective settlement and financial restructuring, each of which is provided for under the new bankruptcy legislation. Without access to this relief, the available options for defaults in the kingdom involve liquidation, cash injections, or seeking new jurisdictions for a given case.

In February, the Saudi government launched a financial reporting office within the General Auditing Bureau to combat corruption. Supported by the Public Prosecutor, the new office will monitor both state spending and the finances of major companies in the kingdom. In the same vein, the General Auditing Bureau aims to establish an electronic auditing system and provide free audits for a hundred government agencies. Efforts to create a more transparent, equitable, and rules-based economic environment will be welcomed by prospective investors. Many were rattled by an anti-corruption campaign led by the crown prince in November 2017, which led to the detention of many of Saudi Arabia’s most prominent businesspeople and royal family members, who surrendered a reported $107 billion in cash, real estate, and other assets to the state.

Public offerings of state-run and private firms create another avenue for foreign investment in the kingdom. This process requires firms to subject their financial information to public scrutiny. Although the sale of 5 percent of Saudi Aramco has been delayed, regulations surrounding Aramco’s bond issuance provided a first glimpse into the company’s accounts. Similar offerings are taking place in the private sector. Arabia Centres Company, Saudi Arabia’s largest owner and operator of shopping malls, plans to raise approximately $747 million after pricing its initial public offering at 26 riyals (approximately $6.93) per share. The company will float around 20 percent of its shares on the Tadawul stock exchange. This share sale is the first offering in Saudi Arabia under Regulation S and Rule 144A, which permits the sale of securities to qualified institutional buyers in the United States. A tech-focused company, Al Moammar Information Systems, raised around $58 million in another offering this year. To further increase foreign ownership of Saudi equities, the country’s Capital Markets Authority is mulling a relaxation in the 49 percent limit for foreign strategic investors in shares of listed companies.

However, other private companies have been pushed in the opposite direction by the government. Istidama, a subsidiary of the Ministry of Finance, assumed 36.22 percent of the Saudi Binladin Group following the anti-corruption probe led by the crown prince. Istidama’s stake in the company reflects the ownership relinquished by family members implicated in the probe. Only two Binladin family members remain on the company’s board, and the company is now chaired by Khaled Nahas, a prominent Saudi businessman and board member of Saudi Basic Industries Corporation.

The roles of the government and private sector are intertwined in every economy. Yet, if the Saudi government is to reduce its share of distributive responsibilities within society, it must focus on playing a regulatory, catalytic, and coordinating role. This role shift requires both the institutionalization of greater transparency in commercial processes and the implementation of mechanisms needed to stimulate greater private sector involvement in the country’s economy.