FLIGHT OF CAPITAL FROM SAUDI ARABIA

According to research by JPMorgan, capital outflows of residents in Saudi Arabia are projected at US$65 billion in 2018, or 8.4 per cent of GDP. This is less than the US$80 billion lost in 2017, but a sign of a continued bleed. Significantly, the projection was made before the contretemps with Canada. According to research by Standard Chartered, the first quarter of 2018 saw US$14.4 billion in outward portfolio investment into foreign equities, the largest surge since 2008. There are concerns that the government is leaning on banks and asset managers to discourage outflows, a kind of informal capital-control regime.

This flight signals the dimming of the optimism surrounding Crown Prince Mohammed bin Salman’s Vision 2030 economic plan. Many of the institutional reforms outlined in the plan — designed to diversify the Saudi economy, attract foreign investment and create jobs — are needed to liberalize the state-led, resource-dependent economy. Investors had hoped Riyadh would follow through on economic reforms, but have been disheartened by such high-profile actions as the arrest of prominent businessmen last year, and a recent campaign to silence critics, especially women activists. These measures — add to them now the spat with Canada — indicate that the state favours regime stability and consolidation over the rule of law, and the creation of institutions and regulations that can check the state.
How to reverse the flow? There are good regulatory reforms in process in Saudi Arabia, including a new bankruptcy law and a privatization draft law. There are new openings for foreigners to buy shares on the local stock exchange and to become 100 per cent owners of businesses in key sectors like engineering. In the opening of the entertainment market, there is clearly room to grow and investment opportunity should abound.