Saudi Arabia is likely to attract significant foreign capital via direct foreign investments (FDI) and foreign portfolio investments (FPI) in the months ahead, according to analysts.
The recently announced OPEC production cut will also reduce the downside risks for oil prices, enhancing the government’s fiscal flexibility and overall investor sentiment, said the analysts from Al-Rajhi Capital (ARC).
Saudi Arabia’s private sector investments will drive momentum in the Kingdom next year, as they play a major role in achieving the government objectives set out under the National Transformation Plan (NTP) and Vision 2030 through direct investments and public-private partnerships (PPP), Al-Rajhi Capital said in a recent note.
“After setting the stage in 2016, we believe that 2017 will be an important year of implementation with most of the key initiatives picking pace with investments from both the public and private sectors,” the brokerage firm added.
Al-Rajhi Capital’s report — titled “NTP 2020: Stage set, momentum to pick pace” — makes a solid case for private investors, both local and global, to participate in the various opportunities offered by the NTP.
It said that Saudi Arabia has witnessed a watershed year when measurable targets for various ministries and sectors were set through the National Transformation Plan and the Saudi Vision 2030.
The government’s active role in setting the base and the tone for these projects via a number of reforms has also been emphasized, especially in the areas of increasing non-oil revenue, reducing current expenditure and announcing plans to privatize state owned enterprises.
The report also lists initiatives toward achieving the NTP objectives, pointing to the implementation being well underway.
The report expects the momentum to gather pace going forward.
The economists see 2017 as a crucial year when private sector investments have to take shape.
They expect the government’s role in Saudi Arabia to gradually transition from being the primary source of capital/investments in the past to that of a regulator/facilitator/partner, providing a conducive environment for private participation and enterprises.
As per the NTP plan, 40 percent of total investments required to achieve the NTP objectives are expected to be contributed by the private sector.
The potential opportunities for private sector are immense and well spread out across many sectors ranging from strategic divestments/ privatizations by government, to infrastructure, mining, affordable housing, transport, capital markets and a host of other sectors
As the NTP defines mainly objectives, ARC researchers believe that the private sector will have a major role to play both in terms of shaping up the detailed plans and by actively participating in key sectors’ initiatives going forward, through both direct investments and partnerships with government.
“The government’s intent to create a stable and investor friendly environment, and various financial incentives will also give more comfort to the investors,” the report said.
It said that the underlying economy, which is far more diversified in terms of revenue than that is represented by
Tadawul, offers significant opportunities for the private sector.
For example, while petrochemical and banking sectors account for 52 percent of Tadawul’s revenue, they account for only 19 percent of the revenue (excluding oil revenue) of the underlying economy.
With the government initiatives already laying a strong foundation and creating an investor friendly environment, private sector involvement is likely to increase going forward, especially in areas which require investments (mining, infrastructure, transport, health care, housing etc.), technology transfer (localizing industrial and SME supply chains), or which require public private partnerships (religious tourism, power generation, water desalination and water treatment, ICT training etc.).
The report suggested that the upcoming strategic divestments/privatizations of major government-owned assets, such as Saudi Aramco’s IPO (likely scheduled for 2018) and privatization of other state run firms such as SAGO, aviation entities should be attractive for investors.
Over the next few years, over 100 state run firms are set to be privatized, according to the NTP.
The government’s announcement allowing 100 percent ownership being permitted in trading business (retail and wholesale) and Engineering consultancies post the NTP announcement, is also likely to attract meaningful FDI.