As Saudi Arabia’s expensive and unsuccessful oil war grinds on, the Saudi government is turning to more than just cost cutting to try to prop up its deficit laden economy. In order to diversify its economy and attract foreign investment, the Saudi Arabian General Investment Authority (SAGIA) has announced that 100% foreign ownership of some businesses will be allowed for the first time.
Reuters reports that the Saudi King, on a recent visit to Washington, announced that foreign ownership restrictions will be relaxed in certain key market sectors including retail and wholesale goods, as well as an easing on visa requirements for foreign workers and contractors. To date, foreign investment in Saudi Arabia has not been the most attractive proposition in the market, with most major companies being state owned and with a cap of 75 percent foreign ownership. Add to this its small population and endemic corruption problems and it is easy to see why the Saudi market has never really diversified much beyond its massive oil production business.
With the recent (and probably disastrous) Saudi tactic of glutting the market in an attempt to edge out competition, especially American shale producers, Saudi Arabia is now facing a deficit of over $100 billion according to the Australian Financial Review. This is not a sustainable position, and major cost-cutting measures have been put in place as the oil price drops beneath $50 a barrel. Saudi Arabia’s break-even point is at around $100 per barrel. The cost-cutting, however, is never going to be enough, so this new move to woo foreign investment can be seen as an indication that Saudi Arabia has no short term intentions of changing their strategy, and are looking to shore up their economy in the face of continuing deficits any way they can.
While this isn’t exactly earth-shaking news, with Saudi Arabia’s market environment lacking the kinds of motivators that attract investors to upwardly mobile China and India, the opportunity to engage in their retail market it a potentially lucrative one. Saudis consumers may not be numerous, but they are some of the wealthiest in the world. The opportunities this represents for premium retailers like Apple are potentially very rewarding, and investors should watch for moves from big names in the direction of the kingdom.
On top of this, the general regulatory relaxation makes it much easier for large American engineering and shipping companies to win major contracts with the state run oil company Aramco for infrastructure, pipeline, and distribution projects.
Having said all that, most analysts agree that Saudi Arabia’s tactics are unsustainable, with many tipping an imminent rise in oil prices as they eventually abandon their current position and once again limit oil production in the face of stormy protests from their OPEC partners.
[Picture via Getty Images/Pool]