Iraq News Now

The New York Times editorial board recently published an

editorial bemoaning corporations’ continued interest in investing in Saudi

Arabia. The article highlighted a few reasons for Saudi Arabia’s attractiveness

to foreign capital, but provided little context to those reasons, which may be

why the board remains puzzled. Here is a little more on what makes Saudi Arabia

eye-catching to foreign investors.

To start with, it is instructive to see what investors think

about when they consider investing in a foreign country. There are two main

questions that investors ask themselves.

First, what is the potential for returns based on the

prospective investment’s innate commercial characteristics? Here, a key issue

is the existence of a high potential resource that is underdeveloped, either

because it has recently been discovered, or because other factors, including

political or cultural ones such as wars or policy errors, have left the

resource underutilized.

Thus, when mobile telephones started proliferating in Europe

and the US after cellular technology advancements, big productivity returns

were realized. These did not initially extend to Africa due to the absence of

the requisite physical capital and political stability. Once those two gaps

were addressed, investors were able to secure large returns on their

investments in Africa, too.

The second question investors ask is: What is the likelihood

of political shocks in the country, including government expropriation or civil

war? In countries such as Germany or Japan, in the 21st century, these are

essentially non-considerations, allowing investors to focus on the innate

commercial properties of the prospective investment. But as investors in Latin

America and the Middle East have discovered, even the best laid plans can

unravel when a junta decides to seize assets or a militia decides to start a

war.

The Political Risk Group is a private company that sells

analysis to prospective investors, and one of their leading products is the

International Country Risk Guide (ICRG). This composite index assigns each

country a rating of how risky it is to foreign investors, based on three

sub-indices.

The political risk sub-index (50 percent of the weight) gauges

factors such as government stability, corruption, ethnic tensions, and so on.

Here, poor performance can present a threat to an investor’s returns, because

it can lead to bad policy decisions or violent conflict.

The economic risk sub-index (25 percent) is a list of the

key macroeconomic performance indicators, such as per capita income, the level

of economic growth, inflation, and the budget balance. A poor macroeconomy – a

condition that can afflict rich and poor countries alike – is a considerable

threat to investor returns.

The financial risk sub-index (25 percent) looks at an

additional suite of finance-centric macroeconomic indicators, such as public

debt, exchange rate stability, and foreign reserves. These are the

macroeconomic factors that are most relevant to foreign investors, as they rely

upon a country’s sound integration into the global financial system for their

returns to be secure.

Investors do not seek answers to these questions in a vacuum

– they are ultimately interested in how the country compares to the

alternatives on offer. Thus, a mediocre investment can suddenly look very

attractive if the global economy is performing poorly, and emerging markets are

full of investment risks.

In the context of Saudi Arabia, this last point is very

important. Prospects for the global economy are currently dim, both in advanced

and emerging markets, meaning that sound investments are likely to ignite a

feeding frenzy among foreign capitalists. Consequently, the bar is lower than

usual for Saudi Arabia – a point that many analysts keen to criticize the

Kingdom typically fail to mention.

But what about its commercial and political risks?

On the commercial front, Saudi Arabia checks all the right

boxes: In addition to its oil, it has several underdeveloped resources. In some

cases, such as with mineral resources, these are underdeveloped due to the

indifference of policymakers as high oil prices alleviate the pressure to

develop new sectors. In others, it is due to cultural and political factors, such

as Saudi Arabia’s tourism and entertainment sectors, including its religious

tourism – a sector with massive potential. And in the case of shale oil, it is

due to the novelty of the technology – only the US is a real player in this

market at the moment, and like many countries, Saudi Arabia is yet to start

developing its own shale oil fields.

Another key reason for the under-exploitation of commercial

opportunities in Saudi Arabia is the historic lack of focus on foreign direct

investment as a source of economic growth. Unlike its neighbors Bahrain and the

UAE, which have made it very easy for foreign capitalists to invest in their

economies, Saudi Arabia has only recently developed a tourist visa. The

Economic Vision 2030 firmly reverses that policy stance. Moreover, Saudi Arabia

has a large and young population, amplifying the commercial advantages of

investing there.

With regard to political risk, despite its recent struggles,

Saudi Arabia still gets a lot right from the perspective of foreign investors.

The Kingdom performs well in terms of many ICRG political risk factors. And

even in the areas where it performs more weakly, analysts puzzled by Saudi

Arabia’s continued attractiveness must recall that such factors bear a very

limited weight on an investor’s decision calculus. While it is understandable

for a media outlet to fixate on the Khashoggi affair and to ignore Saudi

Arabia’s low debt-to-GDP ratio and massive foreign reserves, this is not how a

private investor evaluates the situation.

Aramco seizing the headlines is probably not an accident,

either. Most likely, it is part of a Saudi strategy to remind foreign investors

of one of the most successful foreign investments in history. The Saudi Arabia

that discovered oil and sought US assistance was massively underdeveloped

economically. Yet through prudent, technocratic management, respect for

property rights, and intelligent transfer of foreign knowledge, Saudi Arabia

was able to create the most profitable company in the world. Three of the other

countries in the world’s top five countries by oil reserves are Iran, Iraq, and

Venezuela, all of which have oil sectors operating massively below potential,

and which exemplify why foreign investors are wary of investing in such

economies.

Another advantage Saudi Arabia has is its acumen in global

oil markets since the 2014 crash. Despite a bizarre three-year spell in which

media analysts have accused Saudi Arabia of simultaneously flooding oil markets

as part of a scorched earth geopolitical strategy, and restricting oil

production to raise oil prices, Saudi’s oil policymakers have remained

remarkably calm and contributed to a significant improvement in market

conditions from the perspective of producers.

Investors are cognizant of such successes, and are

understandably far more likely to notice them than journalists with no skin in

the game – which is ultimately why, if you really want to understand what an

investor thinks of Saudi Arabia, you should listen to everything the investor

has to say.