"Nomura": The Saudi Sovereign Fund's Bet on Domestic Investment Was Correct.. But the Future Requires Broader Private Sector Participation

SadaNews - Tarek Fadlallah, CEO of the Middle East and North Africa at Japan's investment bank "Nomura", stated that the direction of the Saudi sovereign fund towards local investments and reducing its exposure to foreign stocks was a wise decision, despite the gains achieved by global markets in recent years.

Fadlallah clarified in an interview with Nour Amasha that he has been advocating this direction since the pandemic, as the scale of the transformation required within Saudi Arabia is "immensely large", making it difficult to achieve while investments flow abroad.

He added: "Short-term financial returns can be considered, but the long-term impact of the way the Public Investment Fund has spent its money might be better locally, compared to what could have been achieved in the long run in global markets".

However, he affirmed that the success of the first phase does not eliminate the need for the Public Investment Fund to align its investment strategy with the goal of encouraging private sector participation and foreign investments.

A Broader Discussion About the Fund’s Role

This proposition reflects a broader discussion about the role the fund plays in transforming the Saudi economy within the "Vision 2030" framework. On one hand, the fund's data shows its cumulative contribution of 910 billion riyals to the real non-oil GDP of the Kingdom between 2021 and 2024, in addition to spending nearly 590 billion riyals on local content during the same period. However, its growing role through direct investment has raised questions among several analysts about the impact this has on the role of private capital.

The desire to achieve a greater balance might have been one of the drivers behind the new strategy launched by the fund in April, which states it will open the door "to broader opportunities and partnerships from the local private sector as an investor, partner, and supplier, to be an active partner in sustainable development, in addition to attracting international partners and investors".

Overall, Fadlallah believes that governments in general need to be "extremely cautious" about the extent of their intervention in the local economy, adding that the fund was required to achieve as much as possible as quickly as possible, especially in most cases where private capital was not ready to take the first step, before he noted, "In the meantime, there are cases where the fund perhaps entered areas that private capital could have accessed better".

Indicators of "Vision 2030"

It is noteworthy that the implementation indicators of "Vision 2030" show an increase in private sector participation in GDP to 51%, exceeding the interim target, but still falling short of the final target of 65%. Meanwhile, the percentage of foreign direct investment has increased by 2.8% of the size of the economy, but it remains below the interim goal of 3.4%, while the plan aims to raise it to 5.7% over the next five years.

These goals make expanding the role of local and foreign private sectors an essential part of the next phase of economic transformation. Fadlallah does not confine the challenge to financing alone but also ties it to the quality of companies and the labor market. Saudi Arabia, according to him, has efficiently accomplished much of the "low-hanging fruit" in the early stages of transformation; however, the next phase requires encouraging companies, or even "pressuring them", to improve governance and enhance shareholder returns, similar to what Japan has done with its companies.

Saudi Mega Projects

Fadlallah also believes that the Saudi labor market is now more prepared for the economy of the future than ever before, but it needs time for educational and skill transformations to pass through a whole generation, citing the financial sector as a successful example: "The Saudi CFA Society is one of the largest associations in the region, so there are high-quality competencies in the financial sector. However, there might be some technical sectors that lack a sufficient number of qualified local talents".

Regarding mega projects, Fadlallah views the reevaluation of some as an indicator of the Kingdom's ability to adapt to changing circumstances. "When you start with a plan, you have five or ten goals, but you don't know which ones will actually succeed, and circumstances change".