S&P revises Saudi outlook to stable from positive
S&P revises Saudi outlook to stable from positive
We indicated on June 6, 2014, that we could revise our outlook on Saudi Arabia to stable if we anticipated that weaker economic growth or sustained lower oil prices could lead to GDP per capita that was not commensurate with an improved assessment of economic structure and growth prospects, one of the five key factors that form the foundation of our sovereign credit analysis. We base our outlook revision on our view that, although real economic growth remains relatively strong, we think Saudi Arabia is unlikely to achieve sufficient levels of nominal income to raise the ratings over the next two years. We assume a Brent oil price of $80 per barrel in 2015 and $85 in subsequent years, which will place pressure on the GDP deflator because Saudi Arabia derives about 45 percent of its GDP from the hydrocarbons sector. We now estimate GDP per capita at $23,400 in 2014-2017, down from our June assumption of $25,600. Trend growth in real per capita GDP, which we measure using 10-year weighted-average growth, amounts to about 2 percent during 2008-2017. This is in line with peers that have similar GDP per capita.
The ratings are supported by the very strong external and fiscal positions Saudi Arabia has built up over many years. By managing high oil revenues prudently, the general government has retired virtually all of its debt, generating additional fiscal space for countercyclical policies. We estimate
the general government's net asset position at 118 percent of GDP on average during 2014-2017. Over the same period, we expect Saudi Arabia's external debt, net of liquid external assets, will remain strong, averaging about 210 percent of current account receipts (CARs). The country's external liquidity is similarly strong, with gross financing needs averaging 78 percent of usable reserves and CARs by our estimate.
We note that government reforms are resulting in some improvements to the highly segmented labor market. Saudi nationals' share of private sector employment increased to 15 percent in 2013 from 13 percent in 2012, and women's share of total employment increased to 9.4 percent from 7.7 percent. However, the unemployment rate remains high for Saudi nationals, standing at 11.7 percent compared with 0.2 percent for non-Saudis, leading to an overall 5.6 percent rate in 2013.
We think uncertainty remains regarding whether the private sector can generate enough sufficiently attractive jobs for to absorb the expected significant inflow of Saudi nationals into the labor market in the coming years.
We view Saudi Arabia's economy as undiversified and vulnerable to a sharp and sustained decline in the oil price, notwithstanding government policy to encourage nonoil private sector growth. The hydrocarbon sector accounts for about 44 percent of GDP. However, we find that the non-hydrocarbon sector relies to a significant extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities. About 85 percent of exports and 90 percent of government revenues stem directly from the hydrocarbons sector. In its October 2014 Regional Economic Outlook, the International Monetary Fund indicated that Saudi Arabia's fiscal breakeven oil price will rise to $106 per barrel in 2015 from $98 per barrel in 2014 and $89 per barrel in 2013. This is the oil price necessary to balance the government's budget, all other things remaining equal.
The stable outlook reflects our view that Saudi Arabia will keep its very strong fiscal balance sheet and net external asset position, while monetary policy flexibility remains limited and dependence on income from the hydrocarbons sector stays high.
We could consider a positive rating action if, contrary to our current expectations, economic growth were to support further increases in Saudi Arabia's per capita GDP to levels that would qualify for an improved assessment of economic structure and growth prospects as defined in our criteria.
Nestle streamlines R&D to speed up product innovation
LONDON: Food giant Nestle plans to combine its scientific research operations into a single unit in an attempt to speed up development of new products at a time when competition from smaller rivals is intensifying.
The world’s biggest packaged food maker, with brands including Nescafe coffee and Perrier water, has been struggling with slowing sales growth for years. Now it is also under pressure from activist shareholder Daniel Loeb to increase investor returns.
To better compete, the Swiss company told Reuters it would merge its Nestle Research Center and Nestle Institute of Health Sciences (NIHS) into one organization called Nestle Research.
The new entity, to be announced later on Thursday, will continue to be based in Lausanne, Switzerland and will employ around 800 people.
The reorganization, effective July 1, will not involve job cuts or the closure of facilities, a spokesman said.
By linking the “blue-sky” research done at NIHS with the more commercially focused Research Center, it hopes to accelerate the translation of scientific discoveries into marketable products.
It also hopes this will help it compete with smaller, nimbler rivals who have been eating away at the market share of Nestle and other big firms like Danone, Unilever, Kraft Heinz and Kellogg.
Nestle Chief Technology Officer Stefan Palzer acknowledged earlier this month that his company had to keep pace with rising demand for goods that are organic, gluten-free or vegan.
“Big trends are embraced by smaller companies a bit more actively than the big companies,” Palzer told Reuters before Nestle’s streamlining plans had been finalized.
“We are adjusting our portfolio, doing many innovations and renovations to make the portfolio more relevant and to address those trends, but smaller companies are more agile.”
In the US — the world’s biggest packaged food market — small challenger brands could account for 15 percent of a $464 billion sector in a decade’s time, up from about 5 percent last year, Bernstein Research predicted last year.
The combination of research units is the latest move by Palzer aimed at speeding up development and ensuring research efforts are commercially viable.
Palzer, who took over Nestle’s innovation and research and development operations in January, is also supplementing long-term research projects with incremental product launches made faster by experimenting with new ideas more quickly.
Last month, for example, Palzer and colleagues got the idea for a vegetarian or vegan food product while on a business trip.
“Thursday we had an idea, Friday we returned to Switzerland and Monday evening I was able to taste the first prototype,” Palzer said. “Wednesday, this prototype was shown to the executive board, and Friday it was in the global pipeline.”
He declined to give more details of the product, except to say it is currently being assessed by the operations team to see how long it will take to produce and on what machinery.
Other steps include efforts to apply specific developments to more products, such as Nestle’s recent designer sugar crystals launched in low-sugar Milkybars in March, which will go into other products in the future.
The importance of agility was underlined by Nestle’s recent struggle to capitalize on resurgent demand for frozen foods.
The company says it reformulates one third of its product portfolio every year.
Nestle spent 1.72 billion Swiss francs ($1.73 billion) on R&D last year, down slightly from 2016 but up 22 percent from 2012. The company’s sales fell 2.6 percent over the same period.
As a percentage of sales, its expenditure has fluctuated only a little, but demands on the unit have increased.
Wells Fargo analyst John Baumgartner said that across 10 large publicly traded US food companies, median expenses for R&D and advertising have declined 20 percent over the past five years.
“As voids of ideas and marketing have emerged, start-ups have been more responsive to consumer needs, won the culture and created the emotional connections that drive sales,” he said in a recent note.
Palzer said some industry peers had been outsourcing innovation to cut costs, relying on acquisitions of small brands or partnerships with suppliers.
But he said it was critical for Nestle to maintain scientific expertise in-house to keep its own portfolio fresh and to be an attractive partner for collaboration with others. Nestle does R&D around the world, involving around 5,000 people.
Fundamental scientific research will remain key at Nestle, Palzer said, but he also highlighted the value of external partnerships and acquisitions that can bring in new research or capabilities more easily.
Scientific research and innovation itself is not necessarily the reason why big breakthroughs tend to be rare for multinational companies, said Shaun Browne, investment banker at Houlihan Lokey, who advises food companies on deals.
“They often don’t have the patience or passion that is really required,” Browne said. “Often these things are one individual who is just totally determined and passionate about their product and sees it through.”