Saudi Arabia has money.  But can it attract foreign capital?

Saudi Arabia has money. But can it attract foreign capital?

Saudi Arabia has money.  But can it attract foreign capital?

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As countries and companies race to get their hands on critical raw materials to strengthen supply chains and weather a difficult energy transition, Saudi Arabia is claiming its position. This is a real blessing, especially with growing unease around reliance on China. But are investors ready to trust him for now?

The country’s sovereign wealth fund and state miner is investing up to 11.95 billion riyals ($3.2 billion) to create a fund that will invest worldwide in resources such as copper, nickel and lithium, as a non-operating partner with a minority stake. stake. The company’s formation was announced at Saudi Arabia’s annual Future Minerals forum, where giants like BHP Group Ltd., Rio Tinto Plc to Ivanhoe Mines Ltd., and US and UK officials met last week.

It comes as the kingdom fights to become a global mining center and establish the sector as a crucial pillar of its economy. The new entity will invest up to $15 billion in businesses and assets globally to secure supply for domestic use. Saudi Arabia has spurred the growth of non-oil businesses such as manufacturing, and its economy is now among the fastest growing G20 countries with expanding non-oil industries.

The government’s focus on grabbing raw materials is timely and targeted, especially with supply chains in disarray and regulatory pressures from rising emissions. China’s vital but tenuous role in the global economy has forced companies to look for alternatives. Where will they find their ex-China source? Around the world, shortages of critical minerals are looming and investment in technologies that will bolster or accelerate production has been slow. Meanwhile, large industrial enterprises that are essential for the energy transition, such as solar power plants, electrolytic hydrogen facilities, electric vehicle batteries and carbon capture and storage, need heaps of metals. Despite policies like the US Cut Inflation Act that attempt to reconfigure US manufacturing and have sparked a factory building boom, securing resources has yet to attract real, tangible dollars.

So, while Crown Prince Mohammed bin Salman, or MBS, is about what should be the world’s greatest need — and opportunity — for decades to come, it won’t be easy to execute. It’s not the usual skepticism around a lofty vision; it’s more about jaded corporate leaders and their ability to take risks.

And here’s the rub: no matter how wealthy or well-endowed the kingdom is, it will need foreign investors and capital to help with technology transfers, business strategy, and productivity. As they watch and talk, no one is touching the ground in any significant way, yet.

Attracting foreign direct investment could be Saudi Arabia’s biggest challenge. MBS’s Vision 2030 economic plan hopes to increase the contribution of FDI to gross domestic product from the current 0.7% to 5.7%. Foreign capital in Saudi Arabia has surged in 2021, largely driven by a $12.4 billion pipeline deal by state oil company Saudi Arabian Oil Co., or Aramco. But the big companies that take years to translate into returns have yet to be announced. Multinationals prowl, sign memorandums of understanding and visit, but the money does not arrive(1).

Policymakers and businesses must consider the risks of crowding into a region rich in wealth, but located at the crossroads of geopolitical and economic tensions. In emerging markets, capital-intensive FDI comes with years of contractual cash commitments and borrowing, adding layers of cost and complexity. Can the returns on investment in Saudi Arabia outweigh the risks companies are taking? And could the rules change before they reap the benefits? Multi-billion dollar mining projects require stakeholder approval and are more difficult to engage; public shareholders do not necessarily want to expect long-term returns and are less enthusiastic about big spending. At its peak more than a decade ago, industry spending was nearly $150 billion, but is expected to fall by $11 billion this year globally.

Attracting FDI ultimately becomes a self-fulfilling cycle: once a country or province reaches critical mass, it is easier to attract more. Preferential policies such as tax incentives and free trade zones are helpful for both domestic and foreign companies. Economies of scale take hold and efficiency increases. However, reaching this level of investment is a prerequisite.

Even as the world’s best miners and companies flocked to Riyadh, few talked about innovating on the huge projects that mining demands. Barrick Gold Corp. and Saudi Arabian Mining Co. – known as Maaden – have announced the creation of two exploration joint ventures. Maaden will initially contribute $7.6 million. The kingdom’s miner also announced a $126 million deal with Ivanhoe Electric Inc. Meanwhile, the UK hasn’t gone much beyond a loose pledge, with its business secretary, to the energy and industrial strategy, Grant Shapps, noting that he can never be too dependent on a nation and why it needs partners like Saudi Arabia.

China’s experience in attracting FDI shows that domestically oriented investment is largely driven by the size and growth of the economy. Other important factors such as labor costs and infrastructure are also crucial determinants. The country remains one of the main beneficiaries despite questions about governance structures and legal frameworks. However, it had built itself as the factory of the world and offered its profound manufacturing prowess.

For Saudi Arabia, opening up is a big step, as is welcoming invitations to foreign companies, but it will have to consider whether it can offer foreign investors a big enough opportunity. This calculation is worth making.

More from Bloomberg Opinion:

• What a “Saudi First” policy means for oil and electricity: Javier Blas

• Electric battery bets in Saudi Arabia are a warning: Anjani Trivedi

• US defense of Saudi Arabia not responsible: David Fickling

(1) Based on the latest available data on FDI inflows.

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

Anjani Trivedi is a Bloomberg Opinion columnist. It covers industrials, including police and businesses in the machinery, automotive, electric vehicle and battery industries across Asia-Pacific. Previously, she was a columnist for the Wall Street Journal’s Heard on the Street and a finance and markets reporter for the newspaper. Before that, she was an investment banker in New York and London.

More stories like this are available at bloomberg.com/opinion

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