ECONOMY

FDI SURGE UNDERSCORES SUCCESS OF SAUDI REFORMS

Boosted by ongoing economic reforms, Saudi Arabia’s foreign direct investment (FDI) inflows reached SAR 7.99 billion (USD 2.13 billion) in the third quarter of 2023, a substantial 29.13% upswing compared to the preceding quarter, government data shows.

In contrast, the kingdom's total investments in foreign countries experienced an 8% decline during the same period, amounting to SAR 17.21 billion. This surge in FDI aligns with Saudi Arabia's extensive legal, economic, and social reforms aimed at attracting more external funding.

Initiatives undertaken by the authorities include the National Investment Strategy (NIS), the regional headquarters programme, and newly introduced tax incentives, such as zero levies for foreign companies. Critical to Vision 2030, NIS seeks to propel economic growth and diversification, targeting a 5.7% contribution of FDI to GDP and positioning Saudi Arabia among the top 10 economies in the Global Competitiveness Index by 2030.

In 2021, the Saudi government announced its intent to limit contracts with foreign companies that do not have regional headquarters in the kingdom Guidelines issued a year later encouraged companies to establish bases in Saudi Arabia, with a January 2024 deadline set for government agencies to conduct business only with firms having regional headquarters in the country.

Investment minister Khalid Al-Falih revealed in a November interview that the number of licenses issued exceeded their target of 160, with over 200 international firms, including Northern Trust, Bechtel, Pepsico, IHG Hotels and Resorts, PwC, and Deloitte, establishing bases in Riyadh.

Starting 1 January, the Ministry of Investment, in collaboration with the Ministry of Finance and the General Authority for Foreign Trade, will compile a list of companies without headquarters in the kingdom, limiting their consideration for government projects under exceptional circumstances.

In December 2023, the ministry also announced a zero income tax policy for foreign entities relocating their regional headquarters, offering a corporate profits levy exemption for 30 years from the license issuance date. The tax incentives aim to provide stability, strengthen long-term planning, and encourage business expansion within the region. The minister emphasised the benefits, including relaxed Saudisation requirements and work permits for spouses of regional headquarters executives.

STRONG FINISH TO 2023

The latest Purchasing Managers’ Index (PMI) data indicates robust improvement in business conditions within Saudi Arabia's non-oil private sector as 2023 drew to a close. The PMI data reveals a significant surge in activity, propelled by new order intakes, which facilitated the fastest sales growth rate since June.

Bolstered by heightened demand, companies gained increased confidence in pricing strategies, leading to a notable uptick in purchasing activity. However, the report notes a slight decline in employment growth and business activity expectations compared to November.

The kingdom’s non-oil firms continued to experience a substantial surge in activity levels in December, mirroring the momentum observed in November and cutting across various monitored sectors. The expansion in output was primarily attributed to higher inflows of new business, marking the sharpest rate of increase since June. Furthermore, the pace of sales growth reached one of the quickest levels recorded in the past nine years, driven by new clients and increased demand.

In response to the heightened demand, non-oil companies escalated their input purchases, resulting in a marked overall increase in purchases. This, in turn, facilitated a sharp and accelerated rise in stock levels compared to November. Additionally, businesses reaped the benefits of significantly reduced average supplier delivery times, marking one of the sharpest improvements recorded in the 14-year history of the survey.

Higher business activity has also resulted in a strong labour market. Overall unemployment rate in the kingdom for Saudis and non-Saudis reached 5.1% in the third quarter, a 0.7 percentage point decline compared to the same period last year, according to the General Authority for Statistics.

Unemployment rate among Saudis reached 8.6%, a 1.3 percentage point (pp) decline compared to the same period in 2022. The labour force participation rate of Saudis slightly decreased by 0.1 pp reaching 51.6% compared to the previous quarter and decreased by 0.9 pp compared to a year ago. The employment-to-population ratio of Saudis dropped from last quarter by 0.2 pp to 47.2% and decreasing by 0.1 pp compared to Q3/2022.

Labour force participation rate and the employment-to-population ratio for women both increased by 0.6 pp to 35.9% and by 0.3 pp to 30.1%, respectively. Among Saudi males, the labour force participation rate decreased by 0.7 pp reaching 66.8%, while the employment-to-population ratio also decreased by 0.7 pp to reach 63.7%.