Introduction
These are turbulent times. Unprecedented events have taken place in the banking sector, finance and credit markets, including the disappearance of several global financial icons, and the consequences are far from clear. What initially originated as a niche problem in the US mortgage market has now triggered a global economic slowdown. The world's largest economic zones are now officially in recession, including the U.S., Japan and the European Union. Indeed, it seems as if this financial crisis may have the potential to transform the entire global economy, its institutions and its industries.
The global economy is currently navigating uncharted waters. Many forecasting firms are struggling to predict the impact and future direction of the economy, on the basis that previous models no longer apply. ITU remains deeply concerned by the impact of the financial crisis on its Member States and Sector Members. In November 2008, ITU has commissioned a Report ("Confronting the Crisis: The Impact of the Financial Crisis on the ICT Industry") bringing together informed analysis from leading industry experts on the future outlook for the industry and exploring how the financial crisis may impact the telecommunication and ICT sectors, to be published in February 2009. ITU will also host a Strategic Dialogue on the impact of the financial crisis at the World Telecommunication Policy Forum, to be held in Lisbon, Portugal, on 21 April 2009.
The financial crisis could have a mixed impact on the global telecommunication/ICT sector. The credit needed for vital investment in information infrastructure is now more expensive and less abundant. There is evidence that some operators are cancelling or postponing their investment plans. Alternative sources of finance are needed. There is growing pressure on governments to help finance some of the NGNs currently being built or planned. The impact on consumer demand is uncertain, in reduced demand or demand for alternative services. Network operators and service providers (telcos) are adapting their strategy by taking a rigorous approach to cost control and focusing investment on vital services only.
Despite these challenges, however, ICTs also offer key means of helping ITU Member States weather the economic storm, not only as a key sector in their own right, but by boosting economic growth and increasing economic productivity and efficiency. The crisis may challenge some businesses, but it will also revitalize the industry and enable new entrants with new technologies to thrive. Technological transformation is at the very heart of our industry, and the industry can emerge stronger and more resilient from these challenging times.
Origins of the Financial Crisis
A crisis that originated in the market for sub-prime mortgages in the US has now escalated to global proportions, shaking the global financial sector to its foundations and afflicting the economies of many industrialized countries. Recent growth forecasts for developed countries are notable for their complete lack of optimism. Output in advanced economies for 2009 is forecast to contract for the first time ever in the post-war period, whilst GDP growth for developing countries is set to decline from 7.9% in 2007 to 4.5% in 2009. A financial crisis on this scale has not been witnessed since the Great Depression. A golden era of abundant credit has ended, as we enter a new era with the immediate task of rebuilding the global financial system.
The origins of the current crisis lie in the expansion of mortgage lending to the sub-prime market in the US from the late 1990s onwards. Property prices were driven higher through massive growth in lending, low interest rates and the steadfast belief that housing was a 'safe' investment. Mortgages were then packaged into complex debt instruments, which became increasingly popular, as investors diversified portfolio risk in their "search for yield" and mortgage lenders passed on credit risk to investors through mortgage pools, providing ever greater incentives for sub-prime lending.
Investment banks worldwide became exposed to the US sub-prime market through their holdings of these mortgage-backed securities. Their exposure was further intensified by the growing tendency of banks to be over-leveraged, using borrowed funds to augment returns. The US housing market faltered towards the end of 2005 and burst in mid-2006. Defaults and foreclosures have reached staggering proportions, depressing house prices still further. The mortgage-backed securities that had been so sought after now became 'toxic assets', with growing exposure around the world.
HSBC was among the first to suffer, when it reported write-downs of $10.5 billion on sub-prime investments in February 2007. Inter-bank lending slowed, as trust between banks faltered and banks struggled to quantify their exposure to bad debts and toxic assets. A 'credit crunch' developed from mid-2007 onwards, as short-term inter-bank and commercial lending dried up to a fraction of previous levels. Governments have been forced to intervene with capital injections and debt guarantees to restore liquidity.
The financial crisis spread to the real economy, as consumer and business confidence collapsed in the wake of Lehman Brothers' bankruptcy in mid-September 2008. Recessionary fears caused stock markets to crash, whilst oil prices plunged to under $50 a barrel in response to slowing demand. Both the US and EU are now officially in recession, meaning that they have experienced at least two successive quarters of negative growth. This comes partly as a result of expensive or inaccessible credit and negative wealth effects from falling equity and property values. Some countries, notably Iceland, Latvia and Hungary, have experienced even greater economic turmoil and have applied for multi-billion dollar loans from the IMF.
Current macroeconomic indicators are bleak. Global trade is forecast to shrink in 2009 for the first time since 1982, developing country exports are falling, while the World Bank puts expectations for GDP growth for developing countries at around 4.5% for next year (down from its previous projection of 6.4%).
Central banks have responded to the onset of recession by slashing rates in an ongoing effort to pressure banks to resume lending to consumers and each other and to kick-start their economies with a counter-cyclical stimulus. However, alarmingly, inter-bank interest rates appear to have become 'detached' from central interest rates in some economies, while the risk profile of banks has been transformed towards ultra-caution. In some countries, interest rates have been cut to historically low levels, but there is still a lack of credit readily available, as banks impose stringent requirements on individual and business borrowers.
Governments now find themselves navigating uncharted territory in how best to respond to the global economic downturn and weaknesses in the financial system. Most governments now recognize the need for some form of regulation of the financial sector to restore confidence and to prevent further systemic failures. The growing impotency of monetary policy has led to widespread agreement on fiscal stimuli and increased state intervention as possible responses.
Immediate Impact on the Telecommunication/ICT Sector
The most immediate impact of the credit crunch and financial crisis is a lack of readily available credit and higher commercial interest rates. The cuts in central interest rates in some countries have not been reflected in rates for commercial lending, as banks seek to revive their balance sheets, while banks' risk profiles have been transformed to veer on the side of ultra-caution, with banks imposing stringent lending requirements on borrowers. The difficulties in the credit market have seen refinancing costs rise sharply, with recent telco debt issuance being secured at spreads of up to 4.75% in late 2008, up by a clear 3-5% compared to the situation pre-crisis (depending on individual firms' debt ratings). Firms seeking funding for investment now need proven credentials, sound business plans with early cashflow projection, and preferably pre-existing relationships with lenders.
This situation is all the more urgent, given estimates of the supply-side investment needed to modernize the global information infrastructure. A recent study by Nemertes concludes that demand will exceed total broadband capacity at the access layer of the Internet by 2012, with the situation worse than originally projected in the US. Nemertes estimates the global cost of upgrading the Internet to keep pace with demand at US $137 billion over the next five years, with network operators in North America spending 60-70% less than they should be. There may already be, therefore, a major shortfall in the investment needed to bridge the gap between demand and capacity, a shortfall that the financial crisis can only exacerbate.
Alternative sources of finance are needed. There is growing pressure on governments to help finance some of the NGNs currently being built or planned. Many European governments have advocated the need for new IP-based network platforms, and may experience difficulties in allowing them to be postponed, due to the financial difficulties of hard-pressed commercial operators. In September 2008, both the Italian and Greek Governments announced plans to subsidize their national NGN infrastructure. Where bank finance is not available, operators may increasingly explore vendor-financing deals, project, mezzanine or export finance and other types of funding.
Telephone network operators and service providers (telcos) are responding to more expensive credit and uncertain consumer demand by taking a rigorous approach to cost control. When revenues fall, operators usually cut capital expenditure (capex), boosting operating margins and profits. ABI Research estimates that growth rates in global mobile capex may slow from 8.3% in 2008 to 7% in 2009, but mobile capex will probably not decline, at least not on a global basis. Informa finds that operators' investment plans have not been "severely altered" so far, while many operators acknowledge the importance of investment to ensure that quality of services is maintained.
In terms of regulation, confronted by more expensive financing and uncertain demand, operators are likely to push for regulatory holidays to justify their investments in NGN. The regulatory landscape is already undergoing a major transformation in the shift to NGN. As operators seek to share infrastructure to control costs, there will be greater need for regulation of shared infrastructure, while more M&A activity could accelerate the emergence of converged service providers and the need for converged regulatory bodies could grow.
Impact on Individual ICTs
In terms of consumer demand, some analysts point out that during the last recession, mobile telephony and broadband Internet access were not yet mass-market services, suggesting that consumer demand for these services has never been seriously tested by a severe recession. Studies of the income elasticity of demand suggest that telecom services may be luxury services in developing countries, while demand may be rather more inelastic in developed countries. There is evidence of reduced demand for broadband service in some developed economies, although worldwide, Point Topic finds that demand for broadband services is so far relatively robust.
The impact of the financial crisis on the mobile markets was not yet evident in the Q3 2008 numbers and will probably only show up in Q4 2008 numbers. Mobile telephony is the communication technology with the single greatest promise to bridge the digital divide. In December 2008, the global market for mobile passed the milestone of four billion mobile connections. This is equivalent to more than half the world's population having access to a mobile (although in practice the penetration rate is probably below 50% due to individuals owning multiple handsets and not cancelling older subscriptions or pre-paid credit). Growth in mobile has been driven by strong growth in the large emerging markets (especially India and China). Most analysts see no reason why growth in these markets will not continue – indeed, fixed-mobile substitution may intensify due to the financial crisis.
In contrast to mobile, global sales of fixed and mobile WiMAX equipment, as well as phones and Ultra Mobile PCs, had already fallen in Q3 2008 according to Infonetics, and may reduce throughout 2009 due to the recession. With fewer resources available for network roll-out, WiMAX deployment is likely to be inhibited over the next year. Infonetics expects revenue growth to return to the overall market for WiMAX in 2010, with growth driven mainly by mobile WiMAX and developing markets. Maravedis considers that the early impact of the financial crisis has already affected smaller suppliers in the WiMAX ecosystem, but they do not expect the financial crisis to result in a shakeout of the industry.
For NGN, although some projects have been postponed, many operators are proceeding apace with the roll-out, as NGN is perceived as the future of the industry. However, the amounts needed for investment in advanced fibre-based networks are phenomenal, costing an estimated six plus times more for rural areas as for urban, high population-density areas in the European Union. Based on the experience of the UK, Analysys Mason estimates that nationwide deployment of Fibre To The Curb (FTTC) would cost three to four times more than the telecom sector has currently spent to date on deploying the current generation of copper-based broadband services. Faced with a credit crunch, the deployment of NGN could be delayed, unless more imaginative funding schemes and/or state involvement (at the local or national level) arise.
The satellite industry is dominated by large capital-intensive transactions with complex financing packages and long lead times, and could be thus particularly vulnerable to the financial crisis. Satellite's role as a 'gap-filler' for service provision to remote areas could also make it more vulnerable during a downturn, when consumer demand may weaken and there may be less need for spare capacity. However, the long lead times to launch also shield the industry to some extent, since current activity is a reflection of projects planned a few years ago. The impact of the financial crisis on the satellite industry is unlikely to be fully felt for 2-3 years, equivalent to the lead time to procure, build and launch a satellite. This partly explains why many industry observers are still positive – today's activity reflects deals negotiated and agreed during the height of the boom. Recent growth projections remain positive.
Investing in the Future
The massive uncertainty surrounding current market conditions has left many economists struggling to forecast the global economy as it navigates uncharted waters. The speed with which the crisis has spread makes it difficult to predict how consumer demand, operator revenues and regulatory responses will evolve. There are few certain answers; rather, there is a range of different outcomes possible for the global telecommunication/ICT sector, depending on the severity and duration of the financial crisis.
The ICT sector is a vital sector underpinning many other critical sectors and driving economic growth. ICTs are key technologies helping ITU Member States weather the economic storm, not only as a key sector in their own right, but also by boosting economic growth and increasing economic productivity and efficiency. Many communication technologies (including mobile telephony and broadband) still offer huge growth potential, with or without a recession.
Previous downturns show that economic crises create openings for disruptive technologies. The current financial crisis is likely to follow a similar pattern. In some ways, it will reassert the old order with those ICT companies with sustainable business models, stable cash-flows and deep pockets regaining some of the ground they have lost to new market entrants. But it will also create new opportunities for new firms with disruptive technologies to thrive, especially where prices are falling and where technology is changing. Investing in knowledge is even more vital in times of crisis, not less so, and could enable the global economy to innovate its way out of this crisis. Ultimately, for an industry based on innovation and technological change, the financial crisis may challenge some businesses, but it will also revitalize the industry and enable new entrants with new technologies to thrive.
