Increasing foreign investment in Saudi Arabia is a key pillar of MbS’s Vision 2030 programme, which aims to move the Saudi economy away from its dependence on oil and encourage the development of new high-tech industries and an advanced service sector. In 2015, McKinsey & Company estimated that Saudi Arabia would need USD 4 trillion in investment by 2030 to reach its full potential, reduce unemployment and keep debt under control. Many of these funds will need to come from foreign investors, through megaprojects such as Neom, a futuristic city planned for Saudi Arabia’s north western region. It was hoped that Vision 2030 would entice first-time investors into the Kingdom. However, the reputational damage suffered by MbS to date may jeopardise this plan.
Inward foreign investment to Saudi Arabia has been decreasing for the past decade, and the fall was particularly pronounced between 2016 and 2017, falling from USD 7.5 billion to 1.4 billion.
Saudi Arabia’s business environment has suffered from the country’s lack of transparency, obstacles to contract enforcement and difficulties in resolving insolvency, where it was ranked 168th out of 190 countries by the World Bank in 2018.
MbS’s government has introduced policies to try and address these concerns. In January, it eased restrictions on foreign ownership of companies listed on Tadawul, Saudi Arabia’s stock exchange, allowing foreign investors to own up to 49 percent of shares and debt in listed companies, and in October opened four additional sectors to foreign investors. The first modern Saudi bankruptcy law was passed in March, while the government has established investment funds worth USD 18 billion with foreign companies to facilitate their entry to the Saudi market.
However, the Khashoggi assassination has had serious implications for the reputation of MbS and the Saudi government, particularly among investors in the US. MbS had already demonstrated the tendency to eschew caution in favour of decisive action. In under 18 months as Crown Prince, MbS has already orchestrated the arrest of over 200 businessmen, politicians and royals in a purported ‘anti-corruption purge’, forced the temporary resignation of Lebanese prime minister Saad Hariri (who was undertaking a diplomatic visit at the time), and fuelled public spats over social media with Canada for the latter’s criticism of Saudi Arabia’s human rights record. But as more details of Khashoggi’s murder have been leaked, MbS’ brand has been tarnished to an unprecedented degree.
The damage to Saudi Arabia’s reputation among investors was highlighted in a number of cancellations by high-profile attendees Future Investment Initiative (‘FII’), a conference to promote Vision 2030. This was accompanied by around USD 650 million in outflows of foreign funds from Tadawul in the ten days following 11 October, when Turkish media published CCTV footage of alleged Saudi intelligence officers’ entry to Turkey. The US Treasury has issued sanctions prohibiting US citizens from engaging in transactions with 17 officials accused of involvement in the murder and blocking their property, and the US Senate has vowed to impose wider sanctions on Saudi Arabia in 2019, and in December passed a non-binding resolution to withdraw American support from the Saudi-led campaign in Yemen.
However, not all investors have withdrawn from Saudi Arabia, particularly those engaged in Saudi Arabia’s ‘traditional’ industries, such as oil. Patrick Pouyanné, the CEO of French oil company Total, stated that ‘empty chairs at the table’ served no purpose. His company, alongside major oil companies from the US and elsewhere, reportedly signed deals worth USD 34 billion at the FII. Other major investors, such as BlackRock’s CEO Larry Fink, pulled out of the conference, but stated that he wouldn’t ‘run away’ from business in Saudi Arabia, even if MbS was proven to be behind the killing of Khashoggi. Saudi Arabia is still set to be included in the MSCI Emerging Markets Index in June 2019, which could bring as much as USD 45 billion of foreign funds into Saudi stocks.
But the toxification of MbS’s brand has meant that high-concept, ambitious projects designed to draw first-time investors such as Neom, which were already faltering, are likely to be delayed further. Vision 2030 placed a significant emphasis on the development of underdeveloped sectors in Saudi Arabia, including tourism, high-tech industries and tertiary services. There are worrying signs that the types of investors that MbS hoped to attract to support this development might be being scared away. Softbank, a Japan-headquartered conglomerate with interests in a range of industries including telecommunications, finance and energy, decided to downsize a planned USD 200 billion solar generation project in the Kingdom that was already considered to be unfeasible.
Case study 1: Softbank
In 2017, Softbank was reported to be planning USD 15 billion of investments in Neom, and as recently as October this year was set to support a USD 200 billion investment in a solar farm in Saudi Arabia. The PIF has also invested USD 45 billion in Softbank’s Vision Fund. Vision Fund has backed tech US-based start-ups such as WeWork and Slack Technologies.Following Khashoggi’s murder, Softbank’s founder Masayoshi Son (‘Son’) pulled out of FII. Son stated in early November that he was carefully watching the outcome of the case, and that it “might have some impact” on the Vision Fund’s investments, but emphasised that Softbank retained a responsibility to support the people of Saudi Arabia through participating in the country’s modernisation programme. He has since told MbS privately that the Khashoggi affair has put him in a difficult position and reduced Softbank’s planned co-operation in the country, without severing ties fully. A Saudi solar farm project funded in part by SoftBank has reportedly been scaled back, and Softbank’s chief operating officer, Marcelo Claure, said that there was “no certainty” that a second Vision Fund, in which MbS has already publicly offered to invest a further USD 45 billion, would go ahead.
Richard Branson’s Virgin Group suspended talks on the receipt of a USD 1 billion investment from the Public Investment Fund (‘PIF’;), Saudi Arabia’s sovereign wealth fund, in a deal where Virgin had agreed to invest in Saudi Arabia. And Endeavor Content, a sales, financial and advisory agency for the entertainment industry, was reported to be pulling out of a USD 400 million investment with the PIF that would fund projects in both Saudi Arabia and abroad.
Case study 2: Virgin
In October, Richard Branson suspended talks with Saudi Arabia over its planned USD 1 billion investment into space ventures Virgin Orbit and Virgin Galactic. Branson stated that if allegations of Saudi government involvement in Khashoggi’s murder were true, it would change the ability of “any of us in the west” to do business with Saudi Arabia. Less than two hours later, Saudi Arabia withdrew from a planned deal with Virgin Hyperloop One, a strategic investment partnership by Virgin Group aimed at commercializing the hyperloop concept, in which passengers and cargo are transported at speeds similar to air travel through vacuum tubes, in Saudi Arabia. The deal involved feasibility studies for manufacturing, knowledge sharing and route planning for the proposed transport system.
Moreover, recent events have raised the political risk premium on investing in Saudi Arabia. Il-fated foreign policy adventures in the war in Yemen and blockade of Qatar all contribute to a sense of unpredictability in MbS’s behaviour, while the November 2017 ‘anti-corruption purge’ shook investors’ confidence in the business environment. The postponement of a long-awaited public listing of state oil company Saudi Aramco in August, when MbS appears to have been prevented from pushing ahead on the orders of his father, King Salman, also coloured investor perceptions. Since 2015, MbS has taken decisive measures to consolidate power and weaken rival power centres within the Saudi state apparatus, and no obvious challenger to his authority yet exists. However, Khashoggi’s murder and the resulting international uproar may encourage other members of the royal family to manoeuvre into stronger positions behind the scenes, weakening MbS’s authority over the longer term. This risk only increases the uncertainty for the large, long-term investments required to make Vision 2030 a reality.
Saudi Arabia is one of the most active jurisdictions for S-RM’s MENA team. Over the past 12 months, we have undertaken a range of projects helping clients mitigate the risks they face in an increasingly dynamic commercial environment. Our reports profile individuals and companies, and focus on the possible impact of issues such as connections to the ruling family, MbS’ economic modernisation programme, the anti-corruption crackdown and Saudi Arabia’s spat with Qatar. To this end, we have developed a broad network of sources, including royal family members and individuals close to key administrative and security decision-making bodies, to provide key insight and first-hand intelligence.