Healthy competition between friends? The contest for FDI in the Gulf
Niamh McBurney, Senior Analyst | Victor Tricaud, Analyst
The Saudi-UAE alliance has deepened since the mid-2010s, but Saudi Arabia’s ambition to become the region’s central destination for foreign investment and economic activity threatens the UAE’s well-established lead as the premier operating and investment environment in the Gulf for foreign companies.
- The kingdom’s ambitious FDI target for 2030 threatens the UAE’s key market proposition but the desire to attract foreign investors creates a buyers’ market for companies targeting either or both Gulf states.
- Proactive regulation is likely to emerge from both countries as they compete for investment from the same pool of capital in key sectors such as technology and renewables.
- As both countries try to outstrip the other for investor-friendly laws and regulations, foreign businesses investing and operating in both will have to navigate a volatile environment.
- Over the next three to five years economic competition will challenge an influential political partnership in the region, but any friction is likely to be temporary.
On the hunt for FDI
Increasing investment into Saudi Arabia is a key element of the kingdom’s Vision 2030. Launched by Riyadh in April 2016, the Vision 2030 roadmap and other associated policies (such as the National Transformation Plan, which will expand underdeveloped sectors) are designed to propel the country into the vibrant, highly diversified economic structure its policymakers have sought for four decades.
In 2021, the Saudi government announced a target of foreign direct investment (FDI) of at least USD 100bn annually by 2030; the UAE shortly thereafter announce its goal to become one of the world’s ten-largest FDI destinations by the same year (but did not specify a value). Both countries have already embarked on reforms to help meet those goals.
FDI into Saudi averaged USD 5.2bn annually between 2015 and 2019. However, meeting the USD 100bn target by 2030 will require significant privatisation, the expansion of existing sectors and the creation of new ones – all of which have accelerated in recent years but have far to go to be in line with the milestone goals in Vision 2030. By contrast, in the same period, the UAE’s annual net in-bound investment averaged USD 11.32bn: even as a smaller economy, the emirates’ net FDI is double and growing fast, highlighting how far the kingdom has to go.
Saudi Arabia’s development will be broad. Riyadh is looking to expand the country’s economy, with no sector untouched. This will create competition with the UAE for interest and investment in tourism, technology, defence, and renewables – sectors that both Riyadh and Abu Dhabi are prioritising for further growth. The UAE is proactively trying to position itself as the most technologically enabled and sophisticated of all the Gulf economies in the hope this lures greater external investment in these sectors and maintains its existing edge.
An Aerial view shows 24 February 2006 the Jebel Ali port, a harbour with sixty-seven berths south of Dubai, the world's largest manmade port. (Photo credit: NASSER YOUNES/AFP via Getty Images)
The raft of regulatory changes in both countries since late 2020 aims to reduce the burden of red tape and incentivise investment. Although these reforms are largely business-friendly, pro-active policymaking naturally creates volatility as changes are often implemented swiftly without full consultation from the business community, leading to some legal and operational uncertainty for prospective and existing investors. This ambiguity around stability in the regulatory environment will continue into the mid-2020s, as the contiguous economies seek to take investment that might otherwise go elsewhere, and from each other.
This competition will increase the number of moments regulations diverge for companies operating between the two countries, and although that is unlikely to become permanent, there will be periods of increased costs as companies look to meet separate and potentially contradictory regulatory needs. For example, in July 2021, Saudi Arabia abruptly implemented tariffs on certain imports of other Gulf Cooperation Council (GCC) states - including those from freezones to the detriment of the UAE - disrupting trade for several weeks at least, but without it prompting an overt economic response from the UAE. Similar events are likely in the coming five years as both countries will continue to implement regulatory changes – both defensive and aggressive – in attempts to safeguard their interests at the expense of the other.
Regulatory volatility in both countries naturally creates an advantage for the UAE. Although it is quickly reforming to maintain its head start on the kingdom, its underlying legal and regulatory infrastructure is long-established and familiar, in comparison to the regulations the kingdom is building from scratch: the core tenets of investment and operational regulations have remained largely stable for the last decade, and where it has changed, it has further enhanced the existing benefits to foreign investors. The UAE’s already deeper regulatory landscape will be a key tool for the country to fashion itself as the preferred destination, even as Saudi Arabia opens up.
Saudi Crown Prince Mohammed bin Salman bin Abd al-Aziz Al Saud (MbS) is leveraging the full force of the Saudi state and semi-state bodies – such as the Public Investment Fund (PIF), the kingdom’s sovereign wealth fund – to achieve Vision 2030’s ambitious targets, including directly channelling investment into sectors earmarked for substantial growth potential. Tourism, manufacturing, and renewables to fuel the energy transition will continue to receive significant direct and indirect government support to create jobs, increase domestic consumption and new exports to send to market.
The UAE’s earmarked sectors – technology, defence, and renewables – will benefit from more important but less widely-advertised government support through investment by state-owned entities and subsidies to ensure the desired outcomes – of bringing in and keeping talent, boosting the value-add and sophistication of domestic industries and expanding the country’s trading reach – materialise .
Challenges to preserving close ties
From the joint military engagement in Yemen since 2015, to the boycott of Qatar from 2017 to 2021, by acting together, the Saudi-UAE political alliance has reset the dial for what was possible in the region. Even with the benefits to both countries of working together to achieve their desired political order in the Middle East and North Africa, the relationship will yet come under strain as they compete with the same audience for investment, talent, and growth.
Even as both countries’ officials say publicly there is enough FDI to go around, Riyadh’s July 2021 tariff play reinforced that the kingdom’s growth will, at least in certain sectors, come at the UAE’s expense. This will lead to moments of political friction, although they are unlikely to spill out into the public sphere – or if they do, are likely to be smoothed over. The next moment of discord is likely to be on display during the renegotiation of the OPEC and OPEC+ quota systems in September – contradicting policies on oil production will continue to be a point of divergence.
But Abu Dhabi and Riyadh’s close working relationship has helped both to manage their domestic and regional political risks, and will continue to do so over the next three to five years, even if they are competing elsewhere. Into the late 2020s, the changes wrought by the energy transition will make clear how divergent their economic paths and political partnership become.