Saudi Regional Headquarters Program Deadline Looms

The implementation deadline for Saudi Arabia’s Regional Headquarters Program is fast approaching. The program requires most multinational companies to set up a regional headquarters in the country by the beginning of 2024 to secure government contracts. Despite the tense regional mood imposed by the Israel-Hamas conflict and global uncertainties associated with the Russia-Ukraine war, Saudi officials nevertheless struck a confident tone about the RHQ Program at the 2023 Future Investment Initiative conference in Riyadh. The Saudi finance minister, Mohammed Al-Jadaan, said, “The deadline is not new, and yes it will be implemented,” and the minister of economy and planning, Faisal Al-Ibrahim, explained that the RHQ program is “not just a negative reinforcement. There’s a lot of positive reinforcement as well.” Earlier in November, the Saudi minister of investment, Khalid al-Falih, said, “We tick all the boxes,” as a destination for investment flows.

Neighboring Gulf Cooperation Council states – especially the United Arab Emirates – are concerned that the RHQ Program policy pushes regional economic competition beyond acceptable boundaries. Multinational firms with existing or prospective business interests in the Middle East are pondering the implications for their regional operations and investment strategies. The key question is how strictly Saudi officials will set about policy enforcement. The commercial stakes are high: Saudi government spending in 2024 is projected to reach $333 billion – with an emphasis on advancing gigaprojects, other major development initiatives, and the non-oil economy.

Exuding Economic Confidence

Many Saudi government and business actors exude confidence about their country’s economic horizons. There is an undeniable buzz to Riyadh, where new developments and an influx of visitors and professionals support the capital’s economic momentum. A continuous stream of initiatives and projects in other parts of the country – such as in Neom, which recently announced ultraluxury tourism developments Epicon and Siranna – offer a long pipeline of commercial opportunities for firms and investors. Hosting high-profile global events over the next few years will require billions of dollars more in development spending, in addition to shining an international spotlight on the country. Saudi Arabia won the bid to host the World Expo in 2030, is set to host the 2034 FIFA World Cup, and is preparing an Olympics bid.

There are some indications that this economic momentum has helped support the RHQ Program. According to Khalid al-Falih, around 180 licenses have been issued for companies setting up a regional headquarters during 2023, exceeding the annual target of 160 companies. The utilization of a new methodology for calculating foreign direct investments resulted in 2022 figures jumping from $8 billion to $33 billion. The massive correction raises eyebrows, but the intended message from the data revision is that key economic indicators are moving in a positive direction.

Saudi Arabia’s market size and an extraordinarily fast-paced development agenda do represent important drivers of international commercial interest in the country, but other factors matter too. Attracting greater FDI flows and ensuring that top-tier multinational companies establish a long-term presence in Saudi Arabia are ultimately better accomplished by constructive dialogue than being a stickler over a relatively new policy. Both commercial carrots and sticks are required to encourage foreign firms to create new value in the domestic economy, especially through employment creation and skills transfer, as envisioned in the government’s broader plan for economic development. The RHQ Program implementation will therefore likely involve a certain degree of fuzziness – not for a lack of execution ability but rather to enable greater policy flexibility moving forward.

Manageable Headwinds on the Immediate Forecast

Meanwhile, a sense of uneasiness looms over the region. The Israel-Hamas conflict, and concerns that it could spark wider regional instability, is the pressing issue of the moment. Foreign flows into Saudi stocks have proved volatile, with inflows resuming after an exodus in October. According to S&P Global, the economies in Saudi Arabia and most other GCC countries would remain resilient even amid a spread of the conflict.

This coincides with slowing economic growth: Real gross domestic product growth in Saudi Arabia is forecasted to register 0.8% for 2023, down from 8.7% in 2022, according to the International Monetary Fund. The World Bank projects Saudi Arabia’s oil sector will contract by 8.4% in 2023 alongside 4.3% growth of the non-oil sector, but it expects overall growth to rebound to 4.1% in 2024. The non-oil growth rate has remained robust, offering some positive news for ongoing economic diversification efforts.

However, FDI is still falling short of expectations – no matter how the government decides to measure inflows. When $12.4 billion from an oil pipeline deal in 2021 and $15.5 billion from a natural gas pipeline deal in 2022 are stripped from the totals, the foreign investment narrative looks less impressive. The National Investment Strategy aims to boost annual FDI to more than $103 billion by 2030 – a lofty ambition given historical inflows.

Source: World Bank and Saudi Press Agency

Recent surges in Saudi government spending will result in year-on-year deficits, raising concerns over the commitment to fiscal discipline and a familiar willingness to slip “back to the procyclical fiscal policy of the past.” The 2023 fiscal deficit is expected to reach nearly $22 billion, and that of 2024 is projected to rest around $21 billion. However, Saudi officials are less concerned about the short-term impact of deficits. Such deficits demonstrate the government’s commitment to spend amid revenue streams still heavily influenced by oil prices.

Medium-Term Challenges Ahead

Over the medium term, Saudi officials will have to work assiduously to assuage investment-related concerns. Talent availability registers high on this list. Foreign firms want to see a clear alignment between their workforce needs and the skills present in the local labor market or be confident that they can draw upon a pool of talented expatriates within the country or overseas. In Gulf countries with large local populations like Saudi Arabia, the prospect for increasingly strict workforce nationalization requirements – known as Saudization – weighs on investors’ minds. Foreign firms and investors are likewise on the hunt for commercial incentives – often in the form of tax exemptions and other subsidies. Indeed, Saudi officials are in the process of undertaking major income tax reform to better align their system with global standards.

Maintaining regulatory consistency amid a fast-paced economic transformation process is not an easy task, nor can a trusted track record on commercial regulation emerge overnight. Regulatory overhauls (even if intended to improve the ease of doing business) introduce uncertainty and disruptions that do not always strike the right chord with the business community. Despite the creation of the Saudi Center for Commercial Arbitration in 2016, business leaders worry about commercial dispute settlements, especially given the lack of international arbitration awards being enforced in practice.

Moreover, certain companies operating in strategically sensitive industries – such as defense and security, technology, and government contracting – may struggle to conduct their regionwide operations out of a Saudi headquarters. Sill other foreign firms wonder how a preexisting Middle East regional headquarters outside of the Gulf may impact their eligibility to win Saudi government contracts.

Several subsidiary issues can present obstacles for convincing senior personnel to staff new headquarters in Saudi Arabia – especially if these professionals are relocating with their families. The quality and availability of international schools for children is a key concern. Saudi Arabia’s health-care system, though well established, is not as highly regarded as that of the UAE. Moreover, better connectivity to destinations within and outside of the country is needed for senior business leaders and investors with busy travel schedules.

To its credit, the Saudi government recognizes these areas for improvement and is advancing on various fronts. Saudi Arabia’s legal reforms seek to strike a balance between improving the business environment and “upholding the centrality of sharia in the kingdom’s judicial and legal systems.” The health-care sector has its own transformation program under Vision 2030. And the government has committed to building a new airport in Riyadh along with a second national carrier. However, it will take years to achieve major strides in quality improvement. The newly established airline, Riyadh Air, will not take passengers until 2025.

Neighboring Gulf countries remain a factor in the RHQ Program equation. The brisk pace of Saudi Arabia’s economic transformation under Vision 2030 has not occurred in a regional vacuum but rather alongside ongoing economic policymaking and reforms in other countries. In recent years, the UAE has implemented a raft of policies, reforms, and initiatives intended to improve the country’s livability and attractiveness for multinational companies. These measures are paying off. Major global investment banks, such as Rothschild & Co. and Morgan Stanley, are opening offices in Abu Dhabi Global Market, the capital emirate’s financial free zone. The remaining GCC states with smaller economies must select niche economic domains within which to compete or cooperate with Saudi Arabia.

When it comes to the RHQ Program, the Saudi Arabian government may be the main player at the table, but it doesn’t hold all the cards. Strict policy enforcement of the program is not more important than the overarching objective. Saudi officials ultimately desire deeper engagement with top global firms and sustainable flows of FDI that create new value within the domestic economy. Such an outcome is more likely achieved through frank discussions in boardrooms than by overly rigid directives.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.