US Investment, Trade on the Rise
Michel Cousins, Arab News
 
Despite occasional bouts of political anti-Americanism invading the commercial sector and manifesting themselves in threats of private boycotts, despite the diversification of Saudi commercial ties away from traditional partners, despite the massive growth of investment and trade with China, India and other eastern nations — despite all this, the US remains Saudi Arabia’s largest trading and investment partner. This is still true although last year for the first time, because of an increase in imports of Saudi oil, Japan displaced the US as Saudi Arabia’s principal export destination.

In numerical terms, imports from the US rose to SR32.9 billion in 2005, up 29 percent over 2004. That represents a significant increase in volume — although slightly below the 33 percent rise in imports in 2004.

Exports to the US also rose last year to $27.2 billion, up 30 percent but this was a reflection of the oil price rise during the year. The trend has continued this year. Imports to the end of August 2006 were worth SR18.6 billion ($5 billion), up from SR15.8 billion ($4.2 billion) for the same period last year, a further 19 percent rise. Exports were up by SR81.75 billion ($21.8 billion), up 25 percent for the same period, again largely due to high oil prices during the period.

As far as imports go, these are not the full figures: A significant proportion of Saudi imports from the US arrive through Dubai and other Gulf ports and are not classified either by Saudi or US statistics as US imports. The real figure for US imports could, therefore, be as much as $200 million a month higher.

US investments are even more impressive. There are in excess of 360 Saudi joint venture major projects involving American partners and American technology; American investment in Saudi Arabia is put by the Saudi Arabian General Investment Authority (SAGIA) at over $9 billion.

SAGIA is hoping for much more — and specifically from US investors. A year ago, the government estimated that at least $623 billion in investment would be needed between now and 2020 to develop the economy. That figure has already grown substantially, given the plethora of projects announced in the past few months — new universities, hospitals, housing, ever more industrial projects and four complete economic cities. A fifth, in the Eastern Province, is expected to be announced in the new year. This table of works is bound to grow even more; there will be several more multibillion-dollar projects from the private sector in the next few years and the government is expected to add year by year to the number of development projects as its coffers overflow.

All these figures are certain to be inflated by rising construction costs. Here is one example: When it was first announced, the cost of Aramco-Sumitomo refinery and petrochemical project at Yanbu was put at $4.3 billion; it is now put at $9.8 billion. As a result of such hikes, analysts are now predicting that between now and 2020 actual investment will breach the trillion-dollar barrier.

However, even if it were to be a mere $623 billion, it still breaks down to over $41 billion a year for the next 15 years. Much will come from government funding, from Saudi investors and the market but it still leaves a significant need for foreign investment. But foreign direct investment (FDI) in the Kingdom last year, according to United Nations Conference on Trade and Development’s World Investment Report 2006 (the definitive report on global FDI), amounted to $4.6 billion. This is two and a half times what it was in 2004 but is considerably lower than the UAE’s $12 billion or Turkey’s $9.7 billion. Moreover, a proportion of the Saudi investment figure includes Saudi funds being repatriated.

To tackle this challenge, SAGIA has devised its 10×10 Program, which aims to make the Kingdom one of the world’s Top 10 foreign investment destinations by 2010.

Despite negative profiling of Saudi Arabia in the US media, American business is interested — and active. Over half the investment applications to SAGIA in the first half of 2005 were from American firms. In April this year, Internet giant Cisco Systems announced that it would invest $1 billion in Saudi Arabia over the next five years. The recent visit by Microsoft Chairman Bill Gates has inevitably fueled talk that Microsoft will also be investing in the Kingdom.

There is an awareness in both Washington and Riyadh that much more could be done to encourage two-way investments. There had been speculation that Saudi Arabia’s accession to the World Trade Organization (WTO) last December would soon be followed by a free trade agreement between the US and the Kingdom. The US currently has free trade agreements with Bahrain, Jordan and Morocco; negotiations on a US-Oman free trade agreement were completed last year and are still under way on a US-UAE free trade agreement. At present, though, the idea of a US-Saudi Arabia free trade agreement is on hold. However, a US-Saudi bilateral investment treaty (BIT) is being negotiated.

The US and Saudi Arabia signed a trade and investment agreement in 2003 resulting in the creation of the US-Saudi Arabia Council on Trade and Investment. The subsequent bilateral negotiations and agreement on the Kingdom’s membership of WTO were seen as far more important because they conveyed the message to US business that Saudi Arabia is a financially secure location in which to invest.

How effective the upcoming treaty will be in encouraging US investors will only be evident once the BIT has been in place for a year or two. Saudi Arabia already has three other BITs — with Austria, with the Belgium-Luxembourg economic union and with Malaysia, the rising business partner in the Kingdom. These deals give foreign investors the same rights and comfort levels as nationals in case of disputes. The proposed US-Saudi Arabian BIT, which US officials believe will result in much greater US investment in Saudi Arabia (and the other way round), would have stand-alone value but it would also be a chapter in any future FTA.

Negotiations are expected to continue for a few more months. The US is believed to be demanding further financial deregulation and reform in the Kingdom, on top of what was required in the WTO agreement. Intellectual property rights are an obvious area requiring further action. These are still being widely abused, as a visit to many shopping malls and souks across the Kingdom will confirm; pirated goods are piled high.

US businessmen already active in the Kingdom believe that when it happens the planned Saudi BIT will make a difference — not to the likes of petrochemical companies who are expected to invest anyway, but to others who may have been frightened off for reasons of finance and security. “There are a lot of US companies that are not in the Kingdom, but are in places like Dubai,” one said.

The expected treaty is unlikely to have the same effect as the BITs that the US signed with Eastern Europe in the early 1990s following the fall of communism. In countries such as Poland and Romania, they helped spur a dramatic rise in US investment, but that was from a minuscule base. In the Saudi case, US investment is already substantial. But a BIT could help it to double. There has certainly been a big difference in investment from Malaysia following the Saudi-Malaysian BIT. As one American consultant pondered: “Maybe it will help Microsoft and Intel to invest here.”

 

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