Recession to devastate SA’s ICT, telecoms sectors

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Recession in SA will be devastating to the information and communications technology (ICT) and telecoms sectors, analysts say.

Reacting to news that SA is in recession, with the economy shrinking by 1.4%, according to new gross domestic product (GDP) numbers, released by Statistics SA yesterday, analysts say these two sectors aren’t spared by the effects of the downturn.

SA’s statistics agency says the economy shrank 1.4% in the fourth quarter, following a revised 0.8% contraction in the third quarter in 2019.

Analysts who spoke to ITWeb at that time were in consensus that ICT and telecom sectors were not immune to weaker economic activity.

Now, recessionary market conditions, declining hardware sales and the coronavirus are already spelling tough times ahead for the local channel.

Yesterday, Alviva admitted having a tough end to 2019, with group CEO Pierre Spies blaming a near “recession” environment, among other factors, for somewhat depressed interim results.

“We’re seeing the most pressure we’ve seen from vendors or resellers in many years. I can’t say it’s a recession, but it’s close to a recession if it isn’t technically one,” he said.

Power problems

Nesan Nair, senior portfolio manager at Sasfin Securities, says: “No sector will be immune from a slowdown in GDP.”

He notes the sectors are likely to see further declines “as long as there are delays in addressing the headwinds in a meaningful way”.

According to Ofentse Dazela, director for pricing research at Africa Analysis: “The impact, unfortunately, will be huge. Historical poor economic performance is already adversely affecting the telecoms sector in a number of ways. From the mobile sector side, companies such as Vodacom are evidently grappling to deal with load-shedding episodes; as a result, we have witnessed several network downtimes in the past few weeks.

“While operators have tried to mitigate the impact of incessant Eskom power cuts by relying more on generators to provide power to their various towers, the situation, however, is exacerbated by equally growing battery and diesel theft, as well as vandalism of cellphone towers.”

He notes that in the fixed-line market, Vumatel, which is one of the biggest fibre infrastructure providers in the local market in terms of footprint and service provider participation on its network, also recently announced wholesale price increases on some of its products.

Dazela explains: “The result of this is that large service providers such as Cool Ideas, Vox and MWeb have decided to pass on these additional operational costs to consumers by hiking retail prices.

“Overall, the recession comes as the ICT operating environment is already presenting limited opportunities for growth, as disposable income for many households is already under pressure. The implication is that we will probably see many more ICT companies increasing retail prices, in line with increasing operational costs. Also, we may see more telecoms companies announcing retrenchments going forward.”

Agreeing with the other analysts, Arthur Goldstuck, MD of World Wide Worx, says the consumer has been financially stretched, “and we have already seen the impact of the recession on ICT in SA, with reduced demand for consumer electronics, in particular”.

However, Goldstuck says: “Demand at the high end has not been dampened, with flagship phones still seeing sustained demand. The entry-level segment remains strong as people look for value for money. However, the mid-range segment across all products will be especially fragile.

“In the business market, we are seeing budgets cut to the bone, with a focus on essentials and cost-cutting. It means that certain product and service categories, particularly in hardware and software automation, will thrive as companies focus increasingly on efficiencies. Cloud computing will also prove to have powerful appeal, both thanks to reducing the need for hardware expenditure and the arrival of more hyperscale data centres in South Africa.”

Tougher telcos

Similarly, head of equities at Mergence Investment Managers, Peter Takaendesa, agrees the telecoms sector is not immune to weaker economic activity but cautions that it tends to be relatively defensive compared to other more cyclical sectors.

“Only Vodacom has reported December quarter numbers so far and its service revenue growth accelerated to over 4% partly due to a lower December 2018 base and increased contribution from the new Telkom roaming deal.

“Cell C is still to report later this month but key shareholder BLU [Blue Label Telecoms] suggested its revenue is likely to have been stable. MTN and Telkom have been executing well recently, so they are likely to have continued to grow over this period.

“All that said, it is more likely that sector growth may be challenged in the months ahead as the big operators respond to the CompCom data price order and the coronavirus may affect handset supplies if it lasts longer.”

According to Takaendesa, there are no material near-term measures to improve revenue growth but “over the longer term, the operators have to keep growing new revenue streams such as digital and enterprise services, as well as entering new markets in the rest of Africa, such as Ethiopia – if the price of licences is right”.

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