Davos Of the Desert Gets Its Timing Right

The “Davos in the Desert,” as the annual Future Investment Initiative in Riyadh has come to be known, has often been associated with controversy and crisis. As Saudi Crown Prince Mohammed bin Salman’s showcase event for investors, this year's event may be a chance for a rebound. Investors are anxious to see clear skies and signs of recovery after a difficult 2020.

The inaugural gathering in 2017 was quickly overshadowed by what the government claimed was a crackdown on corruption, in which the venue of the event, Riyadh’s Ritz-Carlton hotel, was turned into a prison for hundreds of rich and powerful Saudis. The detentions of many prominent businesspeople inevitably had a chilling effect on foreign direct investment, which fell to a 14-year low in 2017. The following year, the event was haunted by the recent murder of journalist Jamal Khashoggi: Spooked by the international outcry, global business leaders stayed away.

The 2019 FII was scaled down (along with the size of the initial public offering of the country’s biggest company, Saudi Aramco) as the government tried to refocus efforts on concrete economic reforms. Though foreign direct investment showed a slight pick-up that year, it hasn’t accelerated. And the 2020 edition had to be postponed as the coronavirus pandemic killed off investor interest and stalled progress on major infrastructure and tourism initiatives.

MBS, as the crown prince is commonly known, will be hoping for better as the fourth FII kicks off today. For all the controversies of previous years, his own position as the kingdom’s de facto ruler is unchallenged: He wields complete political authority as well as command of the driving force behind the economy and the country's economic development model, the Public Investment Fund. If there are investment opportunities to be had in Saudi Arabia, they will go through him.

There are some grounds for optimism about the investment climate in the region as a whole. Diplomatic breakthroughs between Arab states and Israel, and the end of the embargo on Qatar, have made the Arabian Peninsula more hospitable to foreign investment. Capital flows between the states of the Gulf Cooperation Council, with their formidable respective sovereign wealth funds, carry the promise of mutual benefit.

Throughout the GCC in 2020, there were serious efforts to restructure labor markets, some more welcoming of wealthy and highly-skilled foreign workers and others focused on shedding the dead weight of bloated public and private sector employment. There were also measures to ease lending requirements in the banking sector and provide stimulus support to both state-related entities and smaller business. And there were consolidations and privatizations within the energy sector, in recognition of the fact that the future of oil wealth will require more active management with new partners, including foreign owners.

Foreign ownership restrictions have been dramatically lifted in Saudi Arabia and across the Gulf Arab states. The American Enterprise Institute’s Gulf Economic Policy Tracker tallies over 1,000 economic-policy shifts in the GCC countries since 2015, with 164 Covid-related measures adopted in 2020 alone. This makes for a more competitive regional economic landscape.

These are changes on the supply side of the Gulf investment opportunity. The real driving factor is on the demand side. The reason more high-profile investors and businesspeople are participating in the FII is a shift in global markets, particularly in emerging markets. There is a demand for higher-yield investments, whether because interest rates are low in the U.S. and Europe, the dollar is weak, or the appetite for risk has increased after a dismal year for emerging markets.

Gulf sovereign-debt instruments have been popular among investors for some time, but investor interest in local-currency debt across emerging markets is growing. There is renewed interest in emerging-market equities, some from index flows and electronically traded funds, but also in privatization and direct investment opportunities. Those direct investment opportunities are across a range of sectors, from the high-profile tourism and real-estate developments of the Red Sea coast, to the more “disruptive” technology investments MBS and the FII tend to publicize.

But other, more basic transitions underway in Saudi Arabia are probably a better sell. Take the Saudi education market for example, where the proportion of private schools is expected to increase to 25% of the total by 2030 from 17% currently, as the government encourages higher education standards and the expansion of offerings. For early education, the Saudi market has plenty of room to grow: Kindergarten enrollment is only about 15% of children. As more women start working, the demand for childcare and early education is expected to balloon. It’s a simple growth story, one that the FII often overlooks in favor of hydrogen power and robot citizens.

Investors are interested in growth stories in emerging markets right now, and willing to take on some degree of risk. The challenge for MBS is to make the case that Saudi Arabia is a better investment destination than its neighbors, and an FII free of controversy is just the platform on which to do that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karen E. Young is a resident scholar at the American Enterprise Institute.

©2021 Bloomberg L.P.

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