WTC gloom for Telkom, SDD

Despite a big drop in the value of the rand and mindset changes, the attacks in New York and Washington on 11 September will have relatively little impact on the overall South African IT market, say research houses BMI-TechKnowledge and Econometrix.

However, in exacerbating existing problems it could lead to further delays in the planned public listing of Telkom and is likely to hurt the cash flow of distribution companies such as beleaguered Siltek Distribution Dynamics (SDD).

"These events have highlighted certain realities in SA but did not show new ones," says BMI MD Andre Wills. "The World Trade Centre attacks had a marginal impact, but not a falling-off-the-cliff impact."

Examples can be drawn from both the general economy and the IT sector. The rand had been steadily depreciating against the dollar all year and the attacks simply caused a further drop. The demand for PCs and servers had been slowing during the year; after 11 September the decline was simply stronger.

In discussions with a cross-section of the top IT buyers in SA, BMI found that the only sector immediately affected by recent events are those companies directly involved in tourism. Brian Neilson, joint-MD of Forge Ahead BMI-T, says most of these tourism companies have frozen their capital expenditure immediately, with the effect that their IT spending has dropped to zero.

But the phenomenon is very much limited to tourism. "Two-thirds of the companies we spoke with said there would be no change in their IT spending, and those that would have changes said it was because of the rand/dollar slide, which was there before," he says.

Major IT vendors in SA had also not reported any cancellation of major contracts or projects.

Overall, BMI has adjusted its expectation for the overall growth of the local IT market from 14% to 12%. However, individual companies may see a much larger impact. Singled out is SDD, the already beleaguered IT distributor. Neilson says increased security means most forms of shipping are slower but airfreight has been slowed most of all. Much of SDDs cash-flow problems are attributed to long shipping times from Europe.

Companies such as Dimension Data and Prism, which earn a majority of their revenues offshore, may seem clear winners due to the rand depreciation. But Neilson says these companies are still sensitive to the net effects on their international organisations, and that may be negative.

The scenario for telecommunications vendors, operators and providers looks marginally worse than before the attacks and the Telecommunications Bill before Parliament may have become more crucial after the attacks.

"We were in a mess anyway," says Wills, referring to the many about-turns on telecoms policy and an "inherently problematic Telkom IPO [initial public offering]".

The most recent slide in rand value has exacerbated the problem, he says. The cost of rolling out infrastructure for the second national operator (SNO), due to be introduced next year, has increased significantly as telecoms equipment is priced mainly in dollars. While an SNO investment may look cheap to offshore investors, they would have to repatriate returns from rand-based revenues, making it more unattractive.

Michiel Bester, director and senior economist at Econometrix, notes that there is a perception of increased risk attached to investments in African countries after 11 September, which means that emerging markets now have to pay significantly more for the money borrowed on international markets.

The net effect is that there is even less likelihood of massive interest in funding the SNO, forcing government to make the licence more attractive through legislative means. At the same time, however, the government is trying to protect the value of a Telkom IPO. A balance is difficult.

Wills believes it very likely that the Telkom IPO will be postponed to the second quarter of 2002, despite the pressure government faces to conclude the listing during this fiscal year. "People are looking more at Europe now, which has its own problems," he says. "It would be inadvisable for Telkom to go to market now."

Another impact of the attacks and resulting rand depreciation is a sharp increase in the cost of landed international bandwidth, says BMI. The likely result is that service providers, especially second and third tier ISPs, will be packing more users into the same amount of international bandwidth, leading to reduced download speeds and much increased user frustration.

Many ISPs have learnt their lesson from previous currency fluctuation, Wills says, and will be passing on the increased costs directly to their corporate clients.

He also expects degradation in satellite services such as DSTV, and a simultaneous increase in price as the costs of leasing satellite transponders increases.

"It is going to get worse before it gets better," he says of the overall bandwidth situation.

However, there is a measure of hope amid the gloom. BMI says there is scope for much-expanded exports of IT services, especially security software and services. Providing call centre services for the European market could also bring in good hard currency.

Also encouraging is that much of the negative impact has already been absorbed.

"The whole IT and telecoms sector has already taken the pain," says Neilson. "How much more pain can they take?"

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