The Saudi Equity Market: Challenges & Opportunities Tarek Fadlallah, CFA Nomura Investment Banking (Middle East) B.S.C. (c) CFA Bahrain Forecast Dinner

The Saudi Equity Market:Challenges & Opportunities

Tarek Fadlallah, CFA

Nomura Investment Banking (Middle East) B.S.C. (c)

CFA Bahrain Forecast Dinner

January 30th, 2010

2© Nomura Investment Banking (Middle East) B.S.C.

Performance Review


Diversity of Character


Monetary Accommodation


The Oil Lubricant


The Virtuous Circle

High Oil Prices High liquidity (public/private)

Improved fiscal balance Stimulus to petrochemical/energy industries

Demographics Population to grow by 3% per year to 35m by 2015

40% of population is under 15 years old Approximately 10m foreign residents

Government PoliciesDeregulation and privatizationEconomic liberalization (WTO)

Establishment of industrial zonesLocalization of workforce

Promotion of tourism

Key Sectors

Housing/Construction

Financial Services

Education

Infrastructure/Utility

Healthcare

TourismSource: Nomura


Economic Forecasts

Source: IMF, Oct 2009

Source: SAMA, NCBC Research, *Provisional numbers from Saudi MOF in 2010 budget

2008 2009 2010 2011Bahrain 6.1 3.0 3.7 4.0Kuwait 6.3 -1.5 3.3 4.4Oman 7.8 4.1 3.8 4.2Qatar 16.4 11.5 18.5 13.2Saudi Arabia 4.4 -0.9 4.0 4.3UAE 7.4 -0.2 2.4 3.4GCC 6.8 0.9 5.3 5.3

Real GDP Growth %

2008 2009* 2010 2011Real GDP (%) 4.5 0.1 4.0 4.1Inflation (%) 9.9 4.4 5.0 5.2Current account Balance (% of GDP) 29.2 5.5 4.1 9.9Fiscal balance (% of GDP) 34.1 -3.3 5.0 -3.6

Saudi Arabia Indicators

Regional economies are set to rebound sharply following last year’s slowdown with IMF forecasting 5.3% real GDP growth

Saudi Arabia’s numbers are strong particularly for its size.


Low Leverage

To bring the leverage ratio back to its historic average the UAE economy can either:

grow its way out of debt

reduce bank credit by AED 203 billion ($55 billion)

….a combination of both

Saudi Arabia credit is broadly at the historical average


Well Diversified


Challenges Economy too reliant on oil revenues, government spending

and cyclical sectors (e.g. banks and petrochemicals)

Following ascension to WTO the pipeline of deregulation has slowed

Industrial fragmentation is hurting efficiency and retarding faster economic development

Management depth and labour quality needs improvement

Lack of institutional investors and dependence on retail investors is keeping market volatile

There is a need to continuously improve Transparency and Corporate Governance


It’s About the Oil


Tight Credit


End of Multiple Expansion?


Mirror Mirror: Wall Street / Tokyo


History Lesson


Conclusions The Saudi stock market is likely to drift in a trading range

credit conditions remain challenging

recovery in corporate earnings is moderate

individuals bruised and foreign access/appetite limited

Back to basics and a time to revisit business models, financial architecture and regulator frameworks

build a deep sukuk market to compliment bank lending

reinforce regulations and promote greater transparency

The worst may be over but the road to prosperity is long


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The Saudi Equity Market: Challenges & Opportunities Tarek Fadlallah, CFA Nomura Investment Banking (Middle East) B.S.C. (c) CFA Bahrain Forecast Dinner