Investing in the Kingdom: A world away from fossil fuels

Investing in the Kingdom: A world away from fossil fuels

Chaddy Kirbaj

A nation traditionally known for its vast reserves of fossil fuels, these days Saudi Arabia, the Middle East and North Africa’s largest economy representing ro-ughly 25 percent of total gross domestic product, has a lot more to offer in-vestors willing to scratch beneath the surface.
The diversification of both investment assets and income sources is likely to remain intact in 2022, led by Public Investment Fund initiatives and the Saudi government’s spending and commitment. We expect that more global firms will choose to settle into the Kingdom – LG Electronics is already planning to open its regional office in Saudi Arabia.
Spurring these changes is Vision 2030, a development program and strategic framework to diversify the country’s economy and develop public service sectors such as healthcare, education and tourism.
What does all of this mean? That investments will be increasingly deployed to nontraditional sectors and will not be limited to tech, e-commerce and electric vehicles, as Saudi Arabia ranks second in the regional venture capital market.
As government initiativ-es and spending drive gro-wth in various fields, we e-xpect to see lucrative inves-tment opportunities in ma-ny sectors including ventu-re capital, renewable energy, e-commerce, biotech a-nd pharma, aerospace and defense, consumer goods, and the entertainment sector. The Kingdom’s VC market grew by 270 percent in 2021 compared to 2020, with more than SR2 billion ($533 million) in funding. We expect this strong momentum in the Saudi VC market to continue in 2022, powered by innovation, loosening government regulations, and risk-tolerant investors.
The Saudi leadership’s concerted drive to diversify its economy away from fossil fuels has led to a broad range of opportunities across multiple industries. For example, though the Kingdom can lay claim to 25 percent of the world’s oil reserves, one of its most promising sectors in the coming years is renewable energy.
Saudi Arabia plans to be-come the regional hub for renewables by 2030, with massive investments in so-lar energy and green hydrogen. In terms of solar energy potential, it is the sixth largest country worldwide.
With an advanced knowledge-based economy and a largely unsaturated regional market, it also offers great potential outside of the energy industry. Saudi Arabia is the world’s 25th largest e-commerce market with a revenue of $7 billion in 2020, and one of the most rapidly growing in the region thanks to big investments in tech infrastructure and improvements to income and government spending, not to mention a young, connected and tech-savvy population.
The Kingdom’s biotech and pharma sectors are also highly promising, with a market size of $8.5 billion representing 37 percent of the MENA market share in pharmaceuticals.
The aerospace and defense industries represent huge opportunities for foreign investors, too: Saudi Arabia boasts one of the world’s highest military budgets per capita, with plans to localize over 50 percent of its military expenditure by 2030.
The country is still, though, heavily reliant on its oil and petrochemicals sector, which represents 70 percent of its GDP. Its economic transformation will take years, making the time factor here very crucial, but strategic long-term investors will consider the returns and values, not just the timing.
We predict that the percentage of GDP represented by the oil and petrochemicals sector will gradually shrink over the next two decades. The country’s young population is creating huge opportunities for both consumer goods manufacturers and the entertainment industry.
For example, Saudi Arabia’s cinema box office takings were up 3 percent in 2020 to reach $115 million, despite global COVID-19 lockdowns. Considering recent figures, easing restrictions on gatherings, strong purchasing power, and the reopening of the Saudi economy in 2021, 2022 is likely to be a very promising year for the entertainment sector, where we expect growth of at least 8 percent.
Two years ago, Saudi Arabia introduced new regulations allowing companies outside of the financial sector to invest in firms listed on the Tadawul stock exchange, and allowing overseas investors to control stakes, in a major bid to attract more foreign strategic investors.
By taking these steps, Saudi Arabia plans to increase the share of the private sector contribution to GDP from 40 percent to 65 percent by 2030, and increase foreign direct investment to 5.7 percent of its GDP by 2030. Saudi officials expect the 2022 budget deficit to shrink to 1.6 percent of its economic output, which will positively impact the Kingdom’s government spending and investment plans.
While both domestic and foreign markets now have full access to the Kingdom’s various investment projects and the potential they offer, we still think that local investors prefer the Tadawul, the ninth largest stock market in the world, thanks to its deep knowledge of locally listed public stocks.
Government bond yields are also extremely attractive for foreign entities, being higher than those in the US and Europe, not to mention the stability of the economy and government.
Saudi government bond yields are currently trading between 2.7 percent to 3.4 percent compared to 1.5 percent for the US10Y treasury bonds yields, making them more attractive for institutional and foreign long-term investors.
With some research and due diligence, and a keen eye for opportunities, there is considerable earning potential to be found in Saudi Arabia in the coming years.

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