[kictanet] No free pass: global financial crisis will impact Africa’s telecoms sector

[alice]

(From Balancing Act)

No free pass: global financial crisis will impact Africa’s telecoms sector

It’s early days but the conventional wisdom so far has been that Africa 
will avoid the worst of the backwash from the global financial crisis. 
Its banks are less over-committed as lenders and its relatively small 
number of consumers still struggle to find credit. However, as 
everything is connected globally, Africa is bound to take a hit like 
every other continent and that hit will impact directly on Africa’s 
telecom’s sector. Russell Southwood tries to read the tea leaves.

Over the last five years about half of the countries on the continent 
have experienced above average economic growth. This growth amongst the 
“fast track” economies has fed through directly into wealth levels among 
the people affected. For example, the middle class in Kenya grew by 3% 
over the last three years: this is a small percentage of a big number so 
it affects several million people. The slower moving economies have 
often been those emerging from civil war so any growth has been a bonus 
compared to past years.

A significant part of the economic growth of the “fast track” African 
countries has come from the giant emerging economies of China and India 
buying food and mineral resources. However, if people in developed 
economies buy less of the consumer goods that have fuelled the growth of 
China’s economy then it in turn will need less mineral resources from 
places like Africa. Less demand for mineral resources will mean lower 
prices for things like oil and copper. The only upside of the latter is 
that there may be less organised cable vandalism. But if China sneezes, 
Africa catches a cold.

So how does this general economic analysis feed through into Africa’s 
telecoms sector and what’s it likely to mean for your business?:

- If you’re trying to raise funds to invest in Africa, life has got 
significantly harder. Some of those who were in the process of doing 
this were talking deals with financial institutions that have now been 
rescued by the US Government. Sovereign wealth funds (largely from 
oil-based economies) may be more immune to the liquidity crisis but the 
fall in the price of oil will cut the scale of these funds over time.

Africa’s local stock exchanges may still be good for some fundraising 
but the scale of funds available is modest alongside the size of past 
deals. The interesting one to watch is Nigeria where the banks still 
appear to be anxious to lend and open for business. Also, barring a 
major financial crisis, the Chinese Government (which has a considerable 
amount of US dollars) will continue to support its export drive by 
offering soft loans to Africa’s impoverished state-owned telco 
incumbents. Perhaps some mobile operators will join them in this queue?

- Africa’s mobile opportunities have been seen as a licence to print 
money and even with proliferating competition, newcomers have been keen 
to enter the market, paying top dollar. However, it’s noticeable that 
some of the more opportunistic investors without a background in 
telecoms have decided to take money and run: for example, Hits Telecom 
has sold out to France Telecom (see news item below). Nevertheless, they 
probably passed coming in the other direction Orascom’s new Africa unit, 
Telecel Globe. The global tides of financial panic wash people in and 
out: remember Vivendi who quit Africa during the telecoms finance crisis 
but returned as things got better.

The logic of the current global crisis dictates that less available 
money will mean lower prices and less contenders. But the number of 
opportunities for new mobile licences or market entry points through 
acquisition are limited. Therefore Africa will do what it’s always done 
best up till now and “sell shortage” at a premium. For there are not 
many places in the world where you can get an above average return on 
your money within eighteen months to two years and there’s still another 
5-10% of the addressable market untouched. And investing in mobile 
telephony is probably a better bet than giving people 120% mortgages on 
their houses in the current climate.

- Less investment means less money going into African economies means 
less growth. Again the specifics are that if a mobile operator invests 
US$200-400 million in a country operation, a large part of that goes 
into things like employing people, buying local services and 
advertising. In advertising terms, the mobile operators have been among 
the top 5 spenders in any country where tracking exists.

With potential buyers of mobile services possibly having less money to 
spend, the competition for the market share they already have will 
intensify. There will be a lot of soothing talk about the importance of 
service and new features before price wars set in. The smaller, 
one-country or small number of country operations will feel this heat 
hardest and will come up for acquisition or may even go out of business 
if the heat gets too intense.

- The glimmer of hope against this backdrop is that the African consumer 
(the person with a monthly salary and some disposable income) is largely 
not in debt to anything like the same level as his or her European or 
American counterpart. They will not splash out wildly in the current 
context but they will continue to spend. The poor who have not yet 
become consumers will continue to scrape by as ever. However, the level 
of remittances from relatives abroad may drop as they become affected by 
the downturn in developed economies.

Last week South Africa’s Finance Minister Trevor Manuel was telling 
people not to panic which is usually a prelude to people heading for the 
lifeboats. However, the worst that appears to be in store is a strong 
dose of wage inflation. Telkom’s failure to address its overstaffing may 
seem like a victory for its employees but if wages continue to rise 
above inflation, it will begin to squeeze the companies already 
pressured profits. Whatever the political pressures, hard times will 
demand drastic solutions.

- Economic slowdown means that Government will have lower tax revenues 
and private companies less income. Both will impact on the replacement 
and purchase cycle for ICT equipment. SAP commented in its Q3 results 
that results from BRICs (the key grouping of developing countries) were 
mixed. And whilst Cisco reported a resurgence in emerging markets 
orders, bookings in Africa were very weak.

Money spent on rescuing deserving causes like banks may also turn into 
money not spent on foreign aid. Since the latter supports a great deal 
of the ICT purchases by African Governments, this will also create a 
tightening in the market, particularly for the larger IT multinationals 
with a presence on the continent. All have put feet on the ground in the 
promise of business tomorrow and the more timid or financially windswept 
may pull back.

- On a counter-cyclical basis, there are two key factors: the big change 
in the cost of international fibre capacity with the arrival of new 
cables and for South Africa, the World Cup in 2010. The first (in 
Q2,2009) will be a welcome boost as bandwidth prices will fall from 
US$5-6,000 a meg on the east coast to nearer to US$500-1,000 a meg. This 
will not be good news for those selling high-priced bandwidth as a way 
of making a living but will benefit those selling services and 
applications on top of the network. On the west coast, this fall will 
happen in Q2, 2010 and will be slightly less dramatic. The World Cup in 
2010 will be a welcome boost to growth for South Africa and is allowing 
it to put in place key infrastructure. The only question is: will it be 
finished on time?

- The hardest part to read is the sheer irrationality of financial 
markets: the kind of cold sweat fear that's been gripping the markets in 
the North does not always relate to fundamentals but it may convey 
itself South. Asia is already anticipating the worst. But this will 
probably only happen if the global crisis keeps extending and there is a 
feeling that Government money simply won’t contain the difficulties. 
Everything hangs on that difficult word confidence.

So hang on to your hat because it may get bumpy….