Khashoggi Scandal Threatens Kingdom’s Vital FDI Inflows

Kashoggi scandal threatens Kingdom's vital FDI inflows.

The most significant damage to Saudi Arabia’s economy from the death of Saudi journalist Jamal Khashoggi is likely to be to the kingdom’s long-term prospects, economists say.

Inward foreign direct investment (FDI) to Saudi Arabia fell sharply last year and is critical to support the country’s Vision 2030 reform program to diversify its oil-dependent economy.

“The uncertainty created by last year’s anti-corruption purge—which was considered to be a shakedown of potential political opponents within or close to the Saudi royal family—is probably one reason why FDI inflows have stayed low this year,” says Jason Tuvey, senior emerging markets economist at Capital Economics.

Inward investment to the kingdom last year fell to $1.4 billion from $7.5 billion a year earlier. “The latest developments will only reinforce concerns,” Tuvey says. “Companies are likely to delay their investment plans, at least until there is some clarity over Khashoggi’s disappearance [which was later revealed as his death] and/or how tensions between Saudi Arabia and the West will play out.”

Riyadh stated that it would retaliate against any sanctions “with greater action.” While some observers interpreted this to mean that the Saudis could cut oil output to push up prices, Tuvey believes Riyadh would be hesitant to go down this route. “Evidence from the 1973 oil embargo is that use of the ‘oil weapon’ ultimately proves self-defeating.”

Global demand for oil would probably weaken as firms and households shift toward more energy-efficient consumption, Tuvey says. “In addition, higher oil prices would simply encourage other producers to raise output and grab market share from Saudi Arabia,” he adds. Renewable energy sources could also get a further boost as an alternative to fossil fuels.

In October, more than a dozen prominent international executives withdrew from the so-called Davos in the Desert conference, which was part of Crown Prince Mohammed bin Salman’s efforts to attract investors to help transform the Saudi economy.