By Margherita Stancati in Riyadh and Nicolas Parasie in Dubai 

The U.S. and Saudi Arabia touted more than $400 billion in deals and potential investments during President Donald Trump's visit to Riyadh, collectively sending a message that the kingdom was open for business.

That was the easy part. Saudi Arabia remains a tough place for foreign companies, observers say.

Challenges range from the lack of bankruptcy legislation to a culture of personal connections. Government policy decisions are sometimes abruptly reversed. And there is a lack of clarity on legal matters, too, due to the coexistence of both civil law and Islamic Shariah law.

Despite some positive changes, "the current system remains treacherous for foreign investors to navigate," said Riyadh-based lawyer Christopher Johnson, who is also vice chair of the American Business Group of Riyadh, a body that promotes U.S. business interests in the kingdom.

Some officials acknowledge change will require time and patience. "The Saudi government is not very efficient," said an economic adviser to the royal court. "It's an area in which we're not doing very well."

Many blue-chip companies aren't deterred.

The U.S. and Saudi Arabia over the weekend unveiled a raft of multibillion-dollar agreements in sectors including energy, technology and health care. Among them is a partnership between General Electric Co., Saudi Arabia's ministry of oil and a government program for joint ventures. The deal, valued at $12 billion, focuses on power generation, digitization technology and oil and gas.

The scope and size of the agreements are in tune with Saudi Arabia's desire to develop new industries at home. That is a central goal of a government effort to reduce the country's dependence on oil. That change, Saudi energy minister Khalid al-Falih said Sunday, "requires our industrial base to grow in the order of magnitude."

But as oil prices have fallen, the business environment has become more challenging. The Saudi government stopped paying construction giants such as the Saudi Binladin Group, resulting in tens of thousands of layoffs of mostly Asian blue-collar workers but also Western engineers and project managers.

Many international banks are positioning themselves to reap the benefits of Saudi Arabia's economic liberalization, including the public offering of the world's largest oil company, Saudi Arabian Oil Co., or Saudi Aramco, which could fetch the Saudi government as much as $100 billion.

But many global lenders have struggled to find their footing in the country. BNP Paribas SA and Standard Chartered PLC lent to Ahmad Hamad Algosaibi & Brothers, a troubled Saudi Arabian conglomerate that defaulted on its debts almost eight years ago, forcing its creditors into a $6 billion restructuring that still hasn't been fully resolved.

Two years ago, HSBC Holdings PLC's Saudi Arabia unit came under investigation by regulators in the kingdom for its role in a stock listing that has left investors nursing heavy losses. HSBC's Saudi unit last year said it has taken provisions to settle issues related to the regulator's investigation, without elaborating.

Last year, the Saudi stock-market regulator banned the local unit of Deloitte & Touche LLP from providing accounting services in the kingdom for two years because of its work with a local contracting company that allegedly had breached market regulations. Deloitte said it was disappointed but respected the regulator's decision.

In the World Bank's Doing Business Index, Saudi Arabia ranks 94 out of 190 economies. In terms of starting a business, Saudi Arabia ranks 147, trailing its Gulf neighbors in the United Arab Emirates and even Iran.

The kingdom has said it is determined to quickly improve the business environment. The government recently established new arbitration centers to handle commercial disputes and is working on a new procurement law for government agencies and on an insolvency law, according to the kingdom's investment agency.

It also introduced a business law last year that includes measures to better protect minority shareholders, and officials have pledged to bring government bodies into the digital age by allowing more business transactions to be handled online.

"The authorities are beginning to make good progress in identifying and reducing obstacles to private-sector growth," said Tim Callen, the International Monetary Fund's mission chief for Saudi Arabia. "These efforts should continue."

Write to Margherita Stancati at margherita.stancati@wsj.com and Nicolas Parasie at nicolas.parasie@wsj.com

 

(END) Dow Jones Newswires

May 21, 2017 19:16 ET (23:16 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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