(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….