The document provides an analysis of economic conditions in the Arabian markets. It discusses how central banks have expanded monetary policies but face limits in stimulating economies. Governments are gaining traction with fiscal policies like infrastructure spending. The pandemic's economic impact remains unpredictable. GCC stock markets have rallied but continue to underperform peers. Banking sectors in the GCC remain profitable despite expected losses. Saudi Arabia is taking risks with contractionary fiscal policies to induce creative destruction and private sector restructuring. Support for small and medium enterprises has been lacking despite their importance. Sovereign wealth funds could provide more support through lending.

1. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Tarek Fadlallah, CFA
Chief Executive Officer
Nomura Asset Management
Middle East
P.O. Box 506882
Dubai, UAE
Tel: +971 4 428 4587
www.nomura-asset.co.uk
June 22nd, 2020
The Arabian Markets
Highlights:
 The central banks are firefighting
and the toolbox is expanding but
its economic effects are limited
 Keynesian policies appear to be
gaining traction in Europe/US
 Deflation should be followed by
inflation probably in mid-2021
 Saudi Arabia is taking big risks
with its contractionary fiscal
policies but at least they are bold
 Governments can set the tone
and lead by example
 It’s well past time to make tough
transformational decisions
 The bloodbath among SMEs may
have been underestimated
 SWFs can still make a difference
by using part of considerable
resources to backstop lending
and boost liquidity
 Balance sheet strength will be a
key metric for investors in the
coming months
Content:
The Afterworld 2
GCC Review 3
Setting the Tone 4
Creative Destruction 5
SMEs & SWFs 6
Altman Z-Score 7
Bottom Line 8
Market Commentary — a product of Sales and Marketing and not Investment Research or Advice
Nomura Asset Management U.K. Limited Dubai branch is regulated by the Dubai Financial Services Authority
The Afterworld

2. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 2
The Afterworld
We still don’t know when the medical pandemic will be over but the damage it has caused already will be
with us for a while, and its impact on some aspect of our society may be permanent.
The S&P500 has completed a remarkable
round trip back into positive territory
underpinned by a Federal Reserve that
has been unapologetically cheerleading
retail investors into the stock market and
doubled down on unorthodox policies it
began implementing over a decade ago.
Falling asset prices can be detrimental to
economic recovery but the brazen style
and scale of intervention has been widely
criticised as market manipulation.
The disconnect between the buoyant financial markets and the economy has been a source of controversy
with record prices being set in stocks and bonds amid the worst economic data since the 1930s.
Firefighting central banks are playing a risky game as they continue to pay the price for their inability to
normalise policy after the financial crisis, and for the failure of governments to build fiscal buffers.
Having previously failed to revive trend growth another prolonged period of low rates will likely encourage
the accumulation of more debt — by companies and countries — that ultimately cannot pay it back.
With US money market assets at nearly
$5 trillion the financial system is flush
with cash to lend.
This will raise leverage, amplify existing
imbalances and fuel further instability.
Unrestrained central bank printing has
also led to an explosion in money
supply that threatens to cause high
inflation if it spills over from financial
assets into the real economy — a genie
the Fed may not be able to bottle.
The central bank toolbox is expanding but its economic effects are limited: the Fed can buy all the junk
bonds it wants but can’t bring back kids to Disneyland, families to restaurants or crowds to sports arenas.
Creative solutions are required to lift aggregated demand, and conventional Keynesian policies appear to
be gaining traction through the European Recovery Fund and proposed US infrastructure spending.
The economic impact and implications of this pandemic are still hugely unpredictable — as John Kenneth
Galbraith noted “the only function of economic forecasting is to make astrology look respectable.”
-5
0
5
10
15
20
1960 1970 1980 1990 2000 2010 2020
US Money Supply (M2) Consumer Price Inflation YoY
Source: Bloomberg
%
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
US Interest Rates This Century
US10 Year Bond Fed Funds Rate
7 Years
%
Source: Bloomberg

3. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 3
GCC Market Review & Valuations
GCC stock markets have rallied from their lows but continue to underperform peers, with Dubai’s DFMGI
among the world’s worst performing stock markets. Moreover, the Saudi TASI looks unappealing on a
variety of traditional metrics such as PER, PBR and EV/EBITDA, lagging only the S&P500 in overvaluation.
Against its own history the Saudi market doesn't look particularly expensive but only if you ignore the
substantial risk of falling EBITDA and deteriorating book values over the next six months.
Weaker consumption, private CapEx
and fiscal austerity renders the profit
outlook bleak with earnings of listed
GCC companies (ex-financials/Aramco)
expected to be lower than in 2009.
Despite reduced growth estimates and
rising bankruptcies the most defensive
sector this year may be banking.
According to Standard & Poor’s the 23
rated GCC banks with $1.5tn in assets
remain highly profitable and can absorb
$36bn in losses before depleting capital.
GCC banks enjoy structural profitability for five main reasons, some of which are peculiar to the region:
1. High regulatory barriers to entry and a virtual
monopoly on domestic lending.
2. Strong liquidity support from the central banks.
3. A large portion of non-interest-bearing deposits
that provides cheap funding and higher spreads than
might be expected in other parts of the world.
4. Stable fee income linked to loan approvals and
currency remittances/transactions.
5. A low cost-to-income ratio partly due to low tax
(zakat) rates and salary costs that are supressed by
modest foreign worker wages and pension costs.
Valuations allow for a degree of multiple expansion — Saudi bank PER 12.5x vs 21.9x for the TASI index.
1.0
1.4
1.8
2.2
2.6
3.0
4
6
8
10
12
14
16
18
01/2009 01/2011 01/2013 01/2015 01/2017 01/2019
Saudi TASI
Enterprise Value/EBITDA Price to Book Ratio (rh scale)
Source: Bloomberg
Source: Bloomberg
Index YTD% 1 Year % PER PBR EV/EBITDA Div Yield ROE
S&P 500 INDEX -3.6 6.4 21.8 3.56 14.5 1.95 13.4
MSCI JAPAN -7.5 2.3 19.5 1.26 9.2 2.48 6.4
MSCI ACWI xUSA -11.5 -5.0 18.2 1.57 9.9 2.96 8.5
MSCI AC ASIA x JAPAN -6.1 0.7 16.8 1.57 11.5 2.46 9.3
MSCI BRIC -8.6 -0.7 15.9 1.86 10.7 2.30 11.8
SAUDI TASI -12.3 -17.7 21.9 1.78 12.1 3.51 7.9
MSCI GCC INDEX -17.4 -14.5 11.3 1.44 #N/A N/A 4.56 12.6
Source: Bloomberg
Sector PER PBR ROE P/EBITDA
Banks 12.5 1.5 11.9 NA
Materials 57.3 1.5 1.6 9.7
Energy 21.9 4.6 19.8 8.7
Telecom 22.9 2.5 11.0 6.8
Real Estate 164.1 1.2 0.7 19.9
Food & Bev 43.9 3.2 7.7 12.3
Retailing 64.6 4.7 22.2 10.6
Insurance 43.8 2.3 5.3 NA
Utilities 134.5 1.0 0.7 2.9
Consumer Services 8.5 1.1 15.0 8.3
Health Equipment 26.8 2.8 10.6 15.1
REITs 19.7 0.9 4.5 12.2
Transportation 18.7 1.6 8.4 5.9
Capital Goods NA 1.4 -8.1 15.4
Commercial/Services 14.8 4.0 27.0 9.6
Food Retailing NA 5.9 16.2 16.5
Media 23.3 3.8 16.7 11.5
Pharma/Life Sciences NA 1.9 -18.3 NA
Diversified Financials 82.0 0.9 1.1 26.7
Consumer Durables NA 1.5 -4.4 122.1
TASI 21.9 1.8 7.9 9.3

4. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 4
Setting the Tone
Winston Churchill said “never let a good crisis go to waste” but similar opportunities in the past were
unfortunately squandered. A difference perhaps this time around is the existence of roadmaps, such as
Vision 2030, that underscore a strong political will and define clear numeric objectives.
Governments can’t compel private companies to merge or sell inefficient businesses but they can lead by
example and transparently submit to challenging performance benchmarks and strict market discipline.
Disengagement
Governments around the world are stepping up to buy equity in distressed companies but the GCC public
sector is already too heavily engaged in the economy and should continue to step back.
Notwithstanding the paternal instincts of Arabian societies, it’s a well observed truth that the private
sector is more efficient at delivering goods and services than the public sector.
Even controlling stakes in companies may be unnecessary, especially if they hint at potential conflicts of
interest that private operators perceive as an unfair advantage, whether it’s in banking, transportation,
telecoms, contracting or real estate development.
Sector Consolidation
Emirates airlines is considered to be the one of the best run in the world, and certainly in the Middle East.
It makes commercial sense for all loss-making regional carriers to surrender their fleets and routes to a
holding company that would be operated and managed by the Dubai-based corporation.
National airlines are twentieth century vanity projects that countries wrongly assumed would be both
profitable and useful policy tools to maximise employment.
Saudia is no nearer an IPO than in 2006 when the privatization process began, while Kuwait and Oman
Airlines, and Bahrain’s Gulf Air, are in a perennial struggle for survival. It’s past time to move on.
Similarly, it is entirely logical for the Saudi Tadawul to absorb the Bahraini, Kuwaiti, Omani and perhaps the
two main UAE stock exchanges, to offer a deep and liquid destination for all investors.
These suggestions may seem far-fetched but this is exactly the degree of change required if visions of the
Middle East as the “new Europe” are to be realised by 2030. Economics trumps politics.
Corporate Governance
The region has seen corporate governance fiascos, including Abraaj and NMC, that have tainted the global
reputation of the capital markets. An emphasis on oversight, independence and severe penalties is vital.
Perhaps the most underrated aspect of the Aramco IPO last year was that it is now subject to a level of
scrutiny that is unparalleled in its history. It’s effectively a window into the financing of Saudi Inc.
There is no more time for incremental change, the clock is ticking and economies need to be rewired for a
post-oil environment and a post-pandemic Afterworld. Governments must lead by example.

5. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 5
Creative Destruction
Amid the worst economic decline in history, Saudi Arabia is cutting public spending, withdrawing cost of
living allowances, increasing VAT, introducing a wide range of import duties and maybe even income tax.
These are deeply contractionary fiscal policies that could not have been made without an evaluation of
their economic impact. One conclusion is that the country has intentionally decided to ‘kitchen sink 2020’
under the cover of covid-19 in order to induce some form of 'creative destruction'.
The phased approach to reengineering the Saudi economy by 2030 was already looking difficult and the
pandemic, along with lower oil prices, has made it virtually impossible without drastic action.
The government has seemingly decided to save its resources and pass a large burden of fiscal adjustment
to the private sector in an attempt to shrink the economy, squeeze out the weakest players, and rebuild.
GDP estimates are falling rapidly and
the consensus is converging around an
alarming decline of 8% this year.
Oxford Economics estimates that over
1.5 million jobs may be lost with nearly
90% being among expatriate workers
in the construction, hospitality and
retail sectors.
The impact on employment among
Saudi nationals should be limited and is
cushioned by government pay-outs as
well as the large public sector.
Economic recovery will be more difficult as output is lost from firms that will shutter over the coming
months and as government revenues remain under strain.
Oil prices may have bottomed but energy companies are adjusting their long term forecasts down with BP
taking a $17 billion impairment hit after lowering the valuation of its reserves from $75 to $55 per barrel.
Saudi Arabia is taking massive risks with its contractionary fiscal policies and the next year could be brutal.
But given the failure of past attempts to restructure the economy, at least this one is bold.
Indeed, the change taking place at the macro-level and in the public sector is arguably more impressive
than the voluntary changes at the micro-level and in the private sector.
Austerity will be particularly painful without a floating exchange rate to help absorb the shock after policy
makers reaffirmed their commitment to defend currency pegs that have helped anchor nascent economies,
provided stability in monetary policy and certainty to investors.
Whether the pegs can be maintained across the GCC over the long term is a matter for debate but
markets have acknowledged the status quo — the 5-year Saudi credit default swap has declined from over
235 basis points to around 97 basis points and the SAR forward rates have eased back since March.
-500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0
Other services
Retail, hotels, restaurants, etc
Construction
Manufacturing
Transportation
Agriculture
Finance and Business
Government
Mining
Oil
Utilities
Saudi Arabia Forecast Job Losses (thousands)
Ex-pat National
Source: Oxford Economics / @sflivermore

6. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 6
SMEs & SWFs
GCC governments have made a huge effort to develop SMEs over the past decade but they have been
found wanting during the pandemic — smaller companies having to largely fend for themselves.
A survey of 1,228 CEOs by the Dubai Chamber of Commerce in April revealed that 70% of those small
and mid-sized enterprises expected to close within six months.
Central banks have injected liquidity into the financial system ostensibly to support these companies but
the local banks, which have a virtual monopoly over domestic lending, have been reluctant to finance them.
The definition of SME varies but the OECD estimates SME lending among its members ranged from 29.7%
of total loans in countries with low GDP per capita, to 38.8% in those with the highest GDP per capita.
SME lending in Saudi Arabia is about 5.8% — a figure that was reached only after a reclassification of SMEs.
An arguably more accurate number based on the previous definition is around 3%.
Lending to SMEs in the UAE is higher but still lags their relative importance to an economy in which they
contribute 46% of GDP, 51% of the workforce and 99.2% in terms of the number of establishments.
The failure to support SMEs more actively through this crisis will lead to the closure of many valuable and
otherwise healthy businesses, undoing years of initiatives aimed at developing the fragile eco-system.
The GCC is not only coping with covid-19 but lower oil prices and an expat exodus. A "triple whammy".
With regional financing needs estimated at nearly $200 billion this is the challenge of a generation and
whether the response to these serious and multiple crises has been sufficient is not a matter of debate.
The Saudi Industrial Development Fund recently stepped in to offer SAR3.7 billion in initiatives to SMEs
including deferment and restructuring of loan instalments in a sign of greater government engagement.
These measures along with those already announced go some way towards meeting corporate needs but
there is scope for Saudi Arabia, and certainly other countries, to do more.
This is an ideal situation for Sovereign Wealth Funds to use a tiny fraction of their considerable resources
— estimated at $2 trillion — to correct market failures and smooth dislocations quickly and efficiently
without compromising their commercial objectives.
SWFs can purchase sukuks issued by large unlisted businesses with no access to the capital markets and
inject liquidity into the economy by acquiring the outstanding account receivables that suffocate SMEs.
They can also backstop loans to profitable companies to whom banks might be reluctant to lend in the
current climate — especially those critical to national development and diversification goals.
Support should not be considered an act of charity but a fiscally responsible and profitable opportunity to
liquefy qualified businesses, buttress economic activity, sustain government revenues and avoid unnecessary
deflationary spirals that look increasingly likely. It sends a positive signal to local and international investors.
The debate around whether expatriate-owned businesses should be ‘bailed out’ is disappointing on many
levels including a misunderstanding of financial multipliers and developmental economics.
Not all companies deserve to be saved but it’s better not to throw out the baby with the bathwater.

7. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 7
Altman Z-Scores
Covid-19 may yet impede the reopening of GCC economies but even if it doesn’t, it is likely that recovery
will be anaemic after an sharp initial bounce with the risk of a prolonged period of deflation.
Deflation is the scourge of balance sheets and
investors would do well to focus on healthy
companies.
The Z-Score was developed by Professor
Edward Altman in the 1960s as a model for
helping lenders predict bankruptcies among
non-financial firms. It is particularly effective
in evaluating manufacturing firms but less
useful for businesses that are prone to high
leverage, such as real estate.
The inputs required are readily available and
include Working Capital, Retained Earnings,
EBIT, Total Assets, Total Liabilities, Sales and
the Market Value of Equity.
The Z-Score is an objective calculation based
on data from published financial statements
but it is a snapshot in time and should be
viewed through a wide lens.
A Z-Score of less than 1.8 indicates the
possibility of bankruptcy within two years
while a score above 3.0 indicates safety.
Applying this methodology to the listed Saudi
companies shows that 67 of 144 qualifying
businesses (46%) registered a score below
1.8 and may be vulnerable to credit events.
Only 51 companies (35%) cleared the advised
3.0 safety threshold.
It’s important to qualify that the model is just
one of many tool for analysis and does not
replace other well-established valuation
methods or expert judgement.
However, it can be a useful metric and an
unbiased starting point for managers to
consider if further reviews may be necessary
and whether corrective steps might be
required to improve financial prospects. Source: Bloomberg
Company Altman Z Score Company Altman Z Score
Saudi Arabian Amiantit Co -0.37 Saudi Co For Hardware CJSC 2.01
Anaam International Holding Gr -0.26 Raydan Food Co 2.08
Naseej International Trading C -0.15 Saudi Basic Industries Corp 2.13
Nama Chemicals Co -0.00 Filing & Packing Materials Man 2.16
Emaar Economic City 0.03 Al Moammar Information Systems 2.16
Saudi Cable Co 0.05 National Co for Glass Manufact 2.19
Saudi Real Estate Co 0.06 Dallah Healthcare Co 2.25
Saudi Electricity Co 0.08 Najran Cement Co 2.26
Rabigh Refining & Petrochemica 0.09 Aldrees Petroleum and Transpor 2.29
Takween Advanced Industries Co 0.13 Ataa Educational Co 2.38
Abdul Mohsen Al-Hokair Tourism 0.28 Al Rajhi REIT 2.43
Saudi Paper Manufacturing Co 0.48 Seera Group Holding 2.43
National Industrialization Co 0.59 Halwani Brothers Co 2.48
Tabuk Agriculture 0.60 National Metal Manufacturing & 2.50
Saudi Kayan Petrochemical Co 0.60 United Electronics Co 2.51
Tihama Advertising & Public Re 0.68 Al Hammadi Co for Development 2.52
Al-Baha Development & Investme 0.69 MEFIC REIT 2.53
Jabal Omar Development Co 0.71 Almarai Co JSC 2.61
Saudi Public Transport Co 0.72 Alahli REIT Fund 1 2.64
Saudi Arabian Mining Co 0.75 Herfy Food Services Co 2.76
Methanol Chemicals Co 0.76 National Gas & Industrializati 2.95
Wafrah for Industry and Develo 0.87 Hail Cement Co 3.00
Sedco Capital REIT Fund 0.93 Al Jouf Agricultural Developme 3.02
Saudi Pharmaceutical Industrie 0.94 Jadwa REIT Alharamain Fund 3.03
Etihad Etisalat Co 0.95 Abdullah Al Othaim Markets Co 3.14
Middle East Paper Co 0.98 AlAbdullatif Industrial Invest 3.26
Saudi Steel Pipe Co 1.00 Saudi Telecom Co 3.27
Al Hassan Ghazi Ibrahim Shaker 1.00 Arabian Cement Co/Saudi Arabia 3.28
Dur Hospitality Co 1.00 Basic Chemical Industries Ltd 3.42
Mobile Telecommunications Co S 1.01 Dr Sulaiman Al Habib Medical S 3.45
Saudi Printing & Packaging Co 1.03 Zahrat Al Waha For Trading Co 3.62
Zamil Industrial Investment Co 1.04 Abdullah Saad Mohammed Abo Moa 3.78
Sahara International Petrochem 1.05 Saudi Airlines Catering Co 3.83
Al Khaleej Training and Educat 1.08 Arriyadh Development Co 3.93
Saudi Marketing Co 1.09 Batic Investments and Logistic 4.54
Red Sea International Co 1.12 Mouwasat Medical Services Co 4.63
Al Jouf Cement Co 1.15 National Medical Care Co 4.67
National Agriculture Developme 1.16 Saudi Ground Services Co 4.83
Arabian Centres Co Ltd 1.18 Jazan Energy and Development C 5.04
Kingdom Holding Co 1.19 Saudi Cement Co 5.17
Derayah REIT 1.21 Eastern Province Cement Co 5.26
Tabuk Cement Co 1.22 National Co for Learning & Edu 5.79
Riyad REIT Fund 1.26 Ash-Sharqiyah Development Co 5.84
Saudi Chemical Co Holding 1.32 Saudia Dairy & Foodstuff Co 6.16
Aseer Trading Tourism & Manufa 1.33 Southern Province Cement Co 6.31
Dar Al Arkan Real Estate Devel 1.42 Yanbu National Petrochemical C 6.49
Saudi Fisheries Co 1.43 Maharah Human Resources Co 6.60
Al Gassim Investment Holding C 1.44 United Wire Factories Co 6.70
Leejam Sports Co JSC 1.47 United International Transport 6.70
Bawan Co 1.48 Baazeem Trading Co 7.00
Astra Industrial Group 1.51 Fitaihi Holding Group 7.09
Savola Group/The 1.53 Taiba Investments Co 7.18
Arabian Pipes Co 1.54 Yanbu Cement Co 7.39
Fawaz Abdulaziz Al Hokair & Co 1.54 Jarir Marketing Co 7.45
Saudi Industrial Services Co 1.55 Jadwa REIT Saudi Fund 7.68
Yamama Cement Co 1.56 Saudi Arabian Fertilizer Co 8.03
Saudi Industrial Investment Gr 1.58 Saudi Vitrified Clay Pipe Co L 8.13
Saudi Ceramic Co 1.59 Advanced Petrochemical Co 9.81
Northern Region Cement Co 1.62 Al Kathiri Holding Co 10.87
Middle East Specialized Cables 1.62 National Gypsum 11.42
National Shipping Co of Saudi 1.69 Alaseel Co 12.44
Saudi Research & Marketing Gro 1.70 Saudi Arabian Oil Co 12.51
Electrical Industries Co 1.71 Qassim Cement Co/The 12.67
L'Azurde Co for Jewelry 1.71 Knowledge Economic City Co 13.00
Saudi Automotive Services Co 1.72 Makkah Construction & Developm 14.51
Al Babtain Power & Telecommuni 1.74 City Cement Co 14.93
Umm Al-Qura Cement Co 1.77 Swicorp Wabel REIT 15.82
Middle East Healthcare Co 1.87 Shams 17.60
Al Yamamah Steel Industries Co 1.91 Saudi Industrial Export Co 29.74
Saudi Industrial Development C 1.91 Alujain Holding 41.48
National Petrochemical Co 1.99 Mulkia Gulf Real Estate REIT F 108.34
Alandalus Property Co 1.99 Al Mashaar REIT 144.03
A score below 1.8 means it's the company is at risk of bankruptcy within two years.
A score above 3.0 is considered safe.

8. Nomura Asset Management U.K. Limited Dubai branch June 22nd, 2020
Page 8
The Bottom Line
Fifteen years ago this author wrote his first commentary on the Arabian markets warning of a bubble in
the regional stock markets. Several stock indices tumbled in the following weeks but the Saudi index went
on to rally another 40% from 13,798 to peak at an adjusted price of 19,854 before falling almost 80%.
The TASI is still 46% lower than its June 2005 levels and the degree of capital destruction has been huge.
One lesson learnt is that fundamentals eventually prevail, another is that the wrong price paid can damage
returns for decades. If conviction is low, then it’s probably better to be fearful than greedy.
It’s intellectually dishonest to sugar coat the covid crisis and pretend that the world economy will quickly
bounce back to its peak. The ‘V’ is a fantasy and the ‘U’ is a hope but other symbols are still possible.
If recovery proves to be protracted or worse, humanity will have the opportunity to rebuild a world which
failed to address the many challenges left over from the last century — with income inequality, fair trade,
immigration, the environment and the role of the state in society among them.
The GCC must change too and while talk of its demise are off the mark, beneath the glitz and glamour is
an archaic economic framework that is still highly cyclical, deeply rent-dependent and overly paternalistic.
Rebuilding a country in the image of a Mckinsey proposal looks simple enough, but socio-economic change
doesn’t translate smoothly from the pages of a PowerPoint presentation. There will be anxiety and pain.
Those responsible for implementing bold transformative change deserve the benefit of the doubt but also
constructive scrutiny — the stakes are too high to fail again.
“Change will not come if we wait for some other person, or if we wait for some other time. We are the
ones we've been waiting for.” ― Barack Obama.
Stay safe and well.
Tarek Fadlallah, CFA
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