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The Saudi Equity Market:
Challenges & Opportunities
CFA Bahrain Forecast Dinner
January 30th, 2010
Tarek Fadlallah, CFA
Nomura Investment Banking (Middle East) B.S.C. (c)
Performance Review
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Diversity of Character
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Monetary Accommodation
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The Oil Lubricant
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The Virtuous Circle
Government Policies
High Oil Prices
Deregulation and privatization
High liquidity (public/private)
Economic liberalization (WTO)
Improved fiscal balance
Establishment of industrial zones
Stimulus to petrochemical/energy industries
Localization of workforce
Promotion of tourism
Demographics
Population to grow by 3% per year to 35m by 2015
40% of population is under 15 years old
Approximately 10m foreign residents
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Key Sectors
Housing/Construction
Financial Services
Education
Infrastructure/Utility
Healthcare
Tourism
Source: Nomura
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Economic Forecasts
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
GCC
2008
6.1
6.3
7.8
16.4
4.4
7.4
6.8
Real GDP Growth %
2009
2010
3.0
3.7
-1.5
3.3
4.1
3.8
11.5
18.5
-0.9
4.0
-0.2
2.4
0.9
5.3
2011
4.0
4.4
4.2
13.2
4.3
3.4
5.3
Real GDP (%)
Inflation (%)
Current account Balance (% of GDP)
Fiscal balance (% of GDP)
Saudi Arabia Indicators
2008 2009* 2010
2011
4.5
0.1
4.0
4.1
9.9
4.4
5.0
5.2
29.2
5.5
4.1
9.9
34.1
-3.3
5.0
-3.6
Source: SAMA, NCBC Research, *Provisional numbers from Saudi MOF in 2010
budget
Source: IMF, Oct 2009
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.
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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
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Well Diversified
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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
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It’s About the Oil
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Tight Credit
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End of Multiple Expansion?
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Mirror Mirror: Wall Street / Tokyo
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History Lesson
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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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