PYRAMID RESEARCH Africa/Middle East Perspective
We at Pyramid Research would like to express our deepest sympathies to all those affected by the horrific events of September 11th in the US. Our thoughts go out to the families and friends of the victims of this tragedy.
The events of September 11th have increased the odds that the US economy will fall into a recession that will drag global markets into a downward economic tailspin. As global markets teeter closer to the edge of recession, this Pyramid Perspective analyses the short- and long-term impact of a worldwide slowdown on African telecommunications markets.
THE PYRAMID PERSPECTIVE
Firm oil prices will have a mixed economic effect
• Africa's rather small share of the global economy means that it is relatively insulated from financial market downturns; politically, African markets are also detached from the world stage. Overall, the prolonged uncertainty in the Middle East coupled with a global economic slowdown will have a mixed effect. Oil-producing markets (notably in the Gulf of Guinea) should benefit from possibly higher oil prices and an increased dependence of developed markets on their output. On the flipside, most African countries are net importers of oil, and should see their growth stunted by higher prices.
Currencies and FDI will take a hit
• Local currencies and foreign direct investment (FDI) will take a direct hit, as they suffer from the so-called flight to quality that always characterizes emerging market jitters. West African markets (the currency of which is pegged to the Euro) may see the CFA Franc strengthen as the US dollar weakens, negatively impacting their ability to export competitively and awakening fears of devaluation. Other markets are likely to experience acceleration in the depreciation of their currencies, with some uplift on exports. Moreover, the already thinning stream of FDI will further dry up, as foreign investors look for refuge in potentially less risky markets. Overall, African economies will sputter along with the rest of the world over the short term, although they may not necessarily follow it into recession.
Governments will scale back sectoral reform
• In African communications markets, the effects of financial market doldrums will be felt most prominently on the supply side. The first concern pertains to policy reactions to a global slowdown, notably the likely scaling back of sectoral reform procedures in the face of a less favorable global environment. State carrier privatizations will likely be pushed back (in South Africa, for instance), as will some market liberalization initiatives (in Tunisia and possibly Nigeria). Procedures that were stopped in their tracks (Cameroon) may be cancelled altogether, with dire consequences for the competitiveness of state carriers. On the whole, governments will have to scale back their expectations. They may further respond by injecting more cash into the telecoms sector to make up for the shortfall in FDI; however, we consider this scenario unlikely, with most governments having been pressured into divestment policies over the past decade and more facing urgent social challenges.
FDI decline will exacerbate the tight accessibility to capital
• The decline in FDI will underpin difficulties in financing projects and acquiring new licenses. Operators with strong cash reserves may remain active (notably MSI, which recently raised $120 million); others may use their precious cash to concentrate on their existing ventures (Orascom in Algeria and MTN in Nigeria). The appetite of global markets for telecoms ventures has waned, and even more so for African projects. The impact in the market will be direct: we expect capital expenditure levels to fall across the board in the short term; even for markets where local institutions can still generate adequate liquidity for capital investments, investors will shun projects that provide little visibility for return on investment.
Operators will be compelled to go back to the basics; deployment of new technologies will be pushed back
• The much tighter accessibility to capital is poised to redefine operators' strategic approach to their markets. For one, most operators will need to rely more on internal cash flows and less on outside sources for their investments in infrastructure. This in turn will make players more cautious about the quality of their investment; we thus anticipate a slowdown in the deployment of new technologies. Those fraught with technical or market-based uncertainties such as 2.5G mobile networks or DSL will be scaled back. In the mobile market, many players may temper their aggressiveness in going after market segments whose ability to afford services is in question, notably by scaling back subsidization.
Consumer demand will remain strong, but business demand is vulnerable
• The impact of an economic slowdown on market demand will be less pronounced, though palpable. Business demand is more vulnerable to a downturn as businesses cut back on expenses. On the consumer side, the appetite for basic communications services has yet to abate; across Africa, demand for mobile services remains strong. We are, however, forecasting a contraction of the addressable markets for telecoms services across the continent, an acknowledgement that the stupendous growth of the past few years had as much to do with pent-up demand as with aggressive supply strategies. The scaling back
of operator programs designed to attract low-end users will limit service affordability. Likewise, high-end services such as broadband Internet access and wireless data are non-starters in the medium term in most markets.
The market exuberance is over: lower capital expenditures and smaller addressable markets will negatively impact growth
• In light of these supply and demand dynamics, we do not expect African markets to sustain the growth levels experienced over the past few years; generally speaking, we will be revising many of our short-term forecasts downward, with the exception of some pockets of growth. Market demand is inching closer to maturation and an economic downturn will only exacerbate these fundamental trends. For South Africa, we anticipate slower growth, although market liberalization may keep capital expenditures high. Exceptions to the downward trend include markets that were liberalized within the past year, such as Nigeria and Kenya, where we are still anticipating strong growth. We are also pushing back our technology adoption forecasts, and anticipate that broadband wire line and wireless will be deployed on a very selective basis.
A global downturn would reinforce the primacy of mobile over fixed
• Strategically, a global economic downturn should help reinforce the primacy of mobile over fixed in African markets. Lower capital expenditure levels will affect operators' ability to diversify with new services such as DSL. Fixed carriers that are not privatized and do not generate sustainable cash flows for investments run the risk of being driven out of business unless they are propped up by governments. For many, the next quarters will certainly be trying times.
Guy Engon Zibi, Pyramid Research
This Perspective provides Pyramid’s view on a significant development in the communications industry. Perspectives are a component of Pyramid’s Advisory Services.
© 2001 The Economist Intelligence Unit Ltd. All rights reserved. Pyramid Research is a division of the Economist Intelligence Unit
© 2001 Mena Report (www.menareport.com)
