In the early days of the global recession, just a few months ago, the conventional wisdom was that Africa looked likely to avoid the worst of the backwash from the plunge in financial markets. Its banks were less over-committed as lenders and its relatively small number of consumers struggled to find credit before any squeeze occurred. 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 ICTs sector. What does the unravelling crisis mean for Africa?
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 people in the countries 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. This is the new "golden triangle" of the changing global economy. Shoppers in developed countries buy things like clothes, shoes and electrical goods from India and China. The income each earns from these exports allows them to buy increasing amounts of raw materials and food from Africa. The rising economic growth in Africa attracts the attention of new investors to the continent.
But the cycle can easily be reversed in a downturn like the present one. 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 vandalism copper telephone cables. But if China sneezes, Africa catches a cold.
The hardest part to calculate is whether this is simply a turning down of the heat or something more like a catastrophic cut. For example, retail figures for the UK in November 2008 show a 0.5% downturn. The low figure is accounted for by the number of new retail entrants still coming into the market. Existing stores showed a larger 2.5% downturn. To which needs to be added 3-4% for loss of income through the impact of inflation. However, Christmas is coming and it is likely to be the last big spend before the steady flow of job loss announcements takes its psychological toll. If retail spending goes 10-20% down, then this will feed directly through into Africa economic prospects.
The shake-up of world currencies which has pushed the US dollar back up to the top of the heap has meant a rapid devaluation of many African countries' currencies. This will have a direct impact on their inflation as nearly all are dependent on high levels of imports. Furthermore devaluation of the currency means that it is worth less and therefore people will want to be paid more. Countries like Tanzania that have kept a relatively low level of inflation will find they are under increased financial pressure as it rises again.
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 in the short to medium term.
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. However, increased inflation will mean that the cost of locally sourced loan funding will go up.
However, barring a major financial crisis, the Chinese Government (which has a considerable amount of US dollars in its reserves) will continue to support its export drive by offering soft loans to Africa's impoverished state-owned telco incumbents. However, TTCL's recent failure to agree a loan with the China Development Bank indicates that conditions are tightening. Nevertheless some mobile operators may soon join the queue to find Chinese bank or vendor financing.
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 sold out to France Telecom in October 2008. 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. The attractive countries are already fully "licensed up" and the less competitive have fewer opportunities: as examples of the former, Ghana now has six mobile operators and Cote d'Ivoire has licensed seven. Togo may soon offer a third licence to Orange but this doesn't quite set the financial blood running as an opportunity in a larger country would.
Therefore Africa will do what it has 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 in developed countries mortgages on their houses worth several times their earnings 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 five 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 but less as inflation undercuts the value of what they earn. The poor who have not yet become consumers will continue to scrape by as ever but will also be affected by less spending from those who have wages to spend. However, the level of remittances from relatives abroad may drop as they in turn become affected by the downturn in developed economies.
In October 2008 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, due to past excesses, South Africa's banks are better regulated than in most developed countries. Nevertheless South Africa appears to be about to experience a strong dose of wage inflation. Telkom's failure to address its under-skilling and over-staffing 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 2008 results that figures from BRICs (the key grouping of developing countries) were mixed. And whilst Cisco reported a resurgence in emerging markets orders for the same period, bookings in Africa were very weak.
Money spent on rescuing the developed countries' "deserving causes" like banks and car-makers 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$5-6,000 a meg per month on the east coast to nearer to US$ 500-1,000 per Mega per month. 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 only 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 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 ...
Source: A version of this article first appeared on 24 October 2008 in Balancing Act's News Update: http://www.balancingact-africa.com.