How Mohammed bin Salman Turned Saudi Arabia Into an Investment Wasteland

How Mohammed bin Salman Turned Saudi Arabia Into an Investment Wasteland

Businesses abroad are still taking his money, but they’re fleeing his country.

Long before the killing of Saudi journalist Jamal Khashoggi, even as credulous Western boosters were promoting Crown Prince Mohammed bin Salman as a reformer and a visionary, the smart money was moving out of Saudi Arabia. And fast.

The reason? Mohammed bin Salman himself.

From 2016 to 2017, foreign direct investment in Saudi Arabia plummeted by an astonishing 80 percent, from about $7.5 billion to about $1.4 billion, according to the U.N. Conference on Trade and Development. Net capital outflows were also way up—largely because wealthy Saudis were moving money abroad, noted Phillip Cornell, an expert in the Saudi economy at the Atlantic Council.

There were a lot of different reasons, but for the most part both savvy outside investors and many Saudi businessmen no longer had faith in the kingdom, considering “the crown prince’s authoritarian tendencies” and “capricious economic policy choices,” Cornell said.

“There was a lot of disappointment in terms of how things are managed internally.”

In other words, Khashoggi’s killing at the hands of Mohammed bin Salman’s security forces—which the Saudis are now confessing was premeditated—has only brought international attention to a problem that close observers of Saudi Arabia had been aware of for more than a year: The crown prince was making bad decisions and scaring a lot of influential and wealthy people away.

Part of that is the crown prince’s aggressive political crackdown. Part of it is pure economic mismanagement. For example, the swift outflow of money has forced Mohammed bin Salman’s government to put in some informal capital controls—but that only made foreign money even more reluctant to come in. The Saudi government has cost itself credibility by promising to balance the budget and reduce unemployment to 9 percent only to back away from those pledges.

In a recent Bloomberg interview, Mohammed bin Salman was asked about his credibility regarding the budget and responded, “I believe we promised to balance the budget in 2023.” The interviewer noted that originally the promise was for 2019. “Yes,” the crown prince said, “because we have advice from a lot of banks, a lot of entities, including the central bank, the World Bank, that you can spend more money in the economy, so why delay that spending?”

He also claimed, in the same interview, that foreign direct investment was climbing back up, saying that in “2018 it will be 90 percent more than 2017. This is the number that we are getting for the first half.”

But that was on Oct. 3, before his government confessed to its involvement in the brutal killing of Khashoggi, a Washington Post columnist who had criticized the crown prince’s tyrannical leadership.

Despite holding two flashy “Davos in the Desert” conferences designed to lure big investors—the latest of which ended Thursday—the would-be reformer was gradually rendering his country toxic for investment, analysts say. Though moves like placing his fellow Saudi royals under arrest at the Ritz-Carlton a year ago—ostensibly as part of an anti-corruption campaign—were popular with Saudi youth, they had a chilling effect on business.

Now, even though he may survive politically, the only way forward for Mohammed bin Salman is to redouble his investments in the best Silicon Valley and tech areas and hope they prove profitable. Because not too many people are going to be investing in him or his plans, especially not now.

According to Saudi officials, this year’s Future Investment Initiative in Riyadh raked in more than $50 billion in investments, but most of that came in traditional deals with Saudi Aramco, the national oil and gas company. Among those who dropped out of the conference (though some companies sent lower-ranking executives in their place) were the chief executives of JPMorgan, Ford, Google Cloud, Viacom, Blackstone, Blackrock, Mastercard, and Uber.

With a few exceptions (such as Endeavor, the Hollywood talent agency that sought to untie itself from a $400 million Saudi investment shortly after the Khashoggi killing came to light), most of Mohammed bin Salman’s foreign business partners have elected to say nothing for the time being. Many, no doubt, hope the Khashoggi controversy will eventually blow over. (Calls made to several high-profile U.S. companies involved in contract negotiations with Saudi Arabia, including ExxonMobil, General Electric, Honeywell, and Microsoft, elicited no response.)

For example, former U.S. Energy Secretary Ernest Moniz issued a statement on Oct. 10 saying he was “suspending my participation” on the advisory board of NEOM, Saudi Arabia’s high-tech “mega-city” project on the Red Sea, which has not yet been built. A spokesman for Moniz told me on Thursday that he was still “studying” the situation.

Yet even before the backlash to the Khashoggi killing caused dozens of high-profile Wall Street and other U.S. business executives to pull out of the “Davos in the Desert” gathering, Mohammed bin Salman had been stumbling badly in realizing his “Vision 2030” plans to convert Saudi Arabia from an oil-based economy to a diversified one. He is desperate to raise capital with an initial public offering of Saudi Aramco, but financial experts laughed when the crown prince claimed the company’s valuation would be $2 trillion; he has been forced to delay his plans until at least 2019, in part because of investor doubts about the structure of the deal.

Nor has Mohammed bin Salman proved himself as an international investor. He has thrown big money at a lot of global businesses in recent years, most of them eager to accept it. The $250 billion Saudi sovereign wealth fund—known as the Public Investment Fund—is already invested in a mind-boggling array of American, Western, and Japanese companies, including Uber, Lyft, Snap, and Masayoshi Son’s Softbank Vision Fund, which in turn has invested in a slew of other cutting-edge companies such as Slack.

But there are serious questions about how well any of this will pay off. And in the face of the capital outflow from Saudi Arabia, the Public Investment Fund is already being used at home to shore up Saudi stock prices, which tanked in mid-October, to the tune of more than a billion dollars in investments. These may not bring a profit. And as U.S. interest rates rise, dollar-denominated assets abroad are likely to become more attractive to Saudi investors, increasing the already mounting outflow of capital. That could increase pressure on the Saudi riyal’s peg to the dollar, creating further incentives for disinvestment.

Overseas, the crown prince has tossed $45 billion into Vision Fund, which is betting on a wide array of risky start-ups by making a minimum $100 million investment in each. He has also put a $2 billion investment into one electric car maker, Tesla; another $1 billion into another electric car maker, Lucid; and $3.5 billion into Uber.

But if oil prices, which have been softening lately, continue to drop into 2019, Mohammed bin Salman may face a liquidity crunch. And a lot of the foreign friends he bought with his billions could well disappear.

Michael Hirsh is a senior correspondent at Foreign Policy@michaelphirsh