ICT and the Financial Crisis

Phillippa Biggs, Economist, International Telecommunication Union11 March 2009

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Agenda

• Origins of the Crisis

• Is this Crisis any Different?

• Firm outlook in high-income economies

• Firm outlook in emerging markets

• Telco strategy

• Impact of the crisis on MENA

• Impact of the crisis on Egypt

Agenda

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Origins of the Crisis

• Niche origins in US housing market and expansion of high-risk Alt-A& sub-prime mortgages.

• Sub-prime mortgages rose from <10% in 2002 to 21% of all mortgages in 2006.%

Distribution of US Dollar Mortgages,US Housing Association

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Risk Pooled Around the World

Investment banks became exposed through holdings of derivatives mortgage-backed securities (MBS)

Source: Bank for International Settlements.

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Crash, Crunch and Crisis

•US housing bubble crashed in 2006, making mortgage-backed securities ‘toxic assets’.

•HSBC announced write-downs of $10.5 bn in Feb 2007, leading to a ‘credit crunch’ & massive decline in inter-bank lending.

•Financial crisis erupted in mid-Sept 2008 in failure of Lehman Bros & sale of Merrill Lynch.

•Situation triggered a global economic slowdown - US, EU & Japan now in recession.

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Is this Crisis Any Different?

• Origins in credit market,rather than an asset bubble.• Crisis originated & spread through systemic failures in financial regulation & banking system.• Originated in high-income countries, but its impact is spreading fast.• Unprecedented coordination to date in intergovernmental response.

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But what is the impact ofthe financial crisis on

ICT firms in Egypt and MENA?

Source: Sequoia.

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Firm outlook is bleak…in high-income countries• Telcos paying 3-4% more for financing

• Uncertain consumer demand not yet tested in recession – consumers are wary

• Need proven business model & cashflows & established credentials to access VC.

• But return of State funding? Government intervening with investment in broadband in Australia, Italy, Greece, USA and EU.

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Outlook in emerging markets

• Demand for mobile largely unaffected, despite softening in some markets

• Mobile phone services still widely viewed as a necessity.

• Growth in mobile broadband and Internet looks set to continue

• BUT… what about the economic backdrop & consumer demand, if emerging markets slide into recession?

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Telco Strategy

• Capex, not opex – focus on controlling costs;

• Consider network-sharing to cut costs;

• Continue to invest in QoS for the future;

• Focus on flat-rate & prepaid packages likely to grow, as popular with consumers (impact on profit margins?);

• Mobile operators more flexible re capex than fixed;

• Cut debt where possible & focus on refinancing.

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What implications for What implications for MENA?MENA?

• MENA benefits from own sources of finance, including SWFs and homegrown investors• Prospects for South-South investment• Strong growth potential in mobile & Internet• Investment in ICTs could offer a way out of the crisis, but needs to be prioritized.• Delays in licenses: Bahrain, Jordan & Lebanon• Still a strong potential role as a regional hub - Outsourcing Destination of the Year 2008

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Growth in Egyptian Growth in Egyptian mobilemobile

Growth of mobile market, 2005-2008

12.6

17.7

30.6

43.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2005 2006 2007 2008

Mill

ion

s

Vodafone Egypt

Etisalat Misr

ECMS

43.8%

40.2%

16.0%

Source: ITU.

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Slowing in growth?Slowing in growth?

Source: Informa.

Year-on-year growth, Q1-Q4 2008

67.1%

55.5%50.2%

43.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Q1 2008 Q2 2008 Q3 2008 Q4 2008

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Impact on Egypt’s telecom Impact on Egypt’s telecom sectorsector

• Strong growth in mobile projected to continue from 58% in 2008 to 74% penetration in 2009, despite crisis • But slowdown in net additions in Q408 (Informa)• Most analysts foresee limited impact on mobile usage and revenues.• Early signs of a slowdown in fixed-line (BMI)• Second fixed-line licence postponed• Egyptian mobile in transition - penetration in cities high – how to grow rural market?

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MobiNil

• Expecting slower revenue growth in 2009,due to slowing economy;

• Mobile BB: 200,000 subscribers Oct 2008

• Mobinil is forecasting year-on-year revenue growth of about 10% in FY2009, compared with over 21% in FY2008.

•Mobinil has also stated it will cut its CAPEX in 2009 to US$450-550m, from $580m in 2008.  

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Vodafone Group

•Cost cutting – 1 billion GBP cost reduction programme, including cuts in headcount

•Asia-Pacific and Middle East growing strongly – ‘Egypt is doing well’’, with growth in 3G and advanced services

•Strengthening its liquidity with bond issuance and effective refinancing

•Emphasizing customer value, mobile data and broadband services.

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Fixed Telephony

• Award of second fixed line licence delayed

• Telecom Egypt continues to build market share

• Meanwhile, mobile broadband offers are coming into their own.

• Impact on the value of the second licence?

• Timing?

• Uncertain investment climate?

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Read more about the impact on the global ICT industry in

Confronting the Crisis: Its Impact on the ICT Industry

www.itu.int/crisis2009/

Thank you for your attentionphillippa.biggs@itu.int