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Saudi Arabia is stumbling in its effort to build a global financial center

While it’s working hard to diversify and modernize its economy, Saudi Arabia is stumbling in its effort to establish a financial center in the kingdom. Emblematic of the problem is the fact that Riyadh’s King Abdullah Financial District, begun a decade ago, has more skyscrapers than tenants.

Crown Prince Mohammad bin Salman’s Vision 2030 plan to turn the kingdom into an investment powerhouse, ballyhooed at first, is meeting more skepticism as MBS, as the crown prince is known, launches ever larger visions. Investors are beginning to question not only the $2 trillion valuation of Saudi Aramco but whether the IPO of 5 percent of the shares of the state-owned oil company will happen at all.

Last year Riyadh fell backward a notch on rankings of global financial centers, according to the London-based Z/Yen Group’s Global Financial Centres Index, which is based on surveys of professionals working in the market. What makes the story in Riyadh interesting is why establishing a financial sector is turning into such a struggle. After all, the Kingdom has massive wealth — the most recent display of it being the possibility, reported by Elon Musk, that Saudi Arabia’s sovereign wealth fund has approached him to invest enough money to turn Tesla into a private company.

A look at the city in the Middle East that has succeeded in establishing a financial center, Dubai, offers some clues to where Riyadh might be falling short. The keys are delivering on the small, steady steps of reform; the changes in tax and legal codes that enable business and finance; and building a culture and society open enough to draw a global expat community.

“If I had to sum up in one word what I have learnt about financial centres over the past 15 years of studying them, that word would be ‘trust,'” said Mark Yeandle, the lead author of the Financial Centres Index, by email. “Dubai have built up a good track record. Riyadh does not yet have this.”

Of course, Saudi Arabia’s stumbles may be momentary. The country’s financial sector got a boost late this spring when MSCI announced in June that it would include Saudi Arabia in its emerging markets index, which means billions in institutional investors’ capital will flow into the stock market, already the region’s largest. The change came after Saudi regulators enabled foreign investors to own up to 49 percent of listed securities. The iShares MSCI Saudi Arabia ETF (KSA) is the No. 1 performer among all single-country funds in 2018. Even as the recent slide in crude oil has lowered its year-to-date return from over 20 percent to 12 percent, it remains the top-performing stock market in the world, and one of only about a dozen that are generating positive performance this year.

MBS needs to diversify the economy rapidly if the country is to avoid what the World Bank called a “looming poverty crisis” brought on by lingering low oil prices and rich state benefits. The World Bank is forecasting a 1.8 percent growth in GDP this year, with more than 2 percent expected for next year, based on the continuing commitment to reform and a recovery in oil production. More than $1 trillion of the $3.5 trillion GDP comes from the oil sector.

Saudi officials did not respond to multiple requests for comment.

A financial sector that can finance domestic deals and serve as a bridge for external investment is crucial. But Riyadh’s path to transformation is seeming much rockier than that of Dubai. In less than two generations, Dubai went from a trading post with no paved roads to the top financial center in Africa and the Middle East. It also became one of the five fastest-growing cities between 2010 and 2015, according to the Brookings Institution. It is still rising in stature as it draws blockchain investment and finishes preparations for the World Expo in 2020.

In some ways, Saudi Arabia is borrowing pages from Dubai’s playbook. Both countries, for instance, have been tax havens for foreigners and the native-born population, as neither have personal income taxes.

But while Dubai moved