Sub-Saharan African Telecom Operators Poised for Robust Growth Despite Challenges

Moody’s ratings firm notes currency depreciation have hit operating conditions in recent years, with sovereign risk weighing heavy on credit quality for some key operators. Lisa Jaeger, Vice President-Senior Analyst at Moody’s ratings joins me to unpack these findings. Lisa, thank you for joining us today. Hi Esther, very good to be here. Right, let′s get right to it. Quite an interesting report, but let′s start with your overall submission is that long-term growth remains robust for telecoms operators in Sub-Saharan Africa, but of course it doesn′t come without its challenges. Just briefly, walk us through the main key drivers and of course those headwinds that operators continue to encounter. Yeah, so we′ve seen growth of the telecom sector in Sub-Saharan Africa, really a lot of growth over the past decade, but we estimate that mobile phone usage has basically doubled over the past decade, but that still as of today not even half the population has access to a mobile phone, and so there still remains a lot of further growth. And so we see three main factors that support this growth and that really differentiate the region also from most other regions in the rest of the world. So one, that′s a very young and fast-growing population with the median age of only 18, which will naturally expand the telco market in the future. Then second, it′s that a lot of people still cannot afford a mobile phone, and so as devices keep on getting cheaper and cheaper, more people will be able to buy one. And then lastly, people that already have a mobile phone may own a more basic version and they′ll be able to upgrade to a smartphone and then be able to use data services on top of just voice services. In terms of the challenges, I think it′s that we′ve seen a bit of an economic downturn over the past several years and currency fluctuations in a lot of countries, in a lot of the bigger countries like Nigeria and Ghana, especially currencies fell in Nigeria. The currency devalued by over 70% since June last year, and that just doesn′t leave operators immune. So that has an impact on some of their investments. We′ll talk about currency risk again, but I wanted to ask where you′ve seen the strongest growth prospects, which countries, the ones that you cover in Sub-Saharan Africa, where you′ve seen the strongest growth prospects and how do they differ from their competitors in the other Sub-Saharan African countries? Yeah, I think Nigeria is really the one country that keeps on coming up. It, first of all, is the most populous country on the continent, still has quite low penetration rates, and there is a lot of investment going into Nigeria. And so that is really what is crucial, investment by tower companies and investment by mobile operators as well that want to reach rural areas. And competition between the operators also causes them to increase investments and to really try to reach those users in the rural areas that aren′t connected yet. And speaking about investment, what is your forecast on capital spending and how metrics like interest rates or high interest rates are impacting on cash flow? How are companies, how are they manoeuvring that issue? Yeah, so as I said, the past two years have been a bit more challenging because of the higher interest rates, because of high inflation and because of currency depreciation. And so because of that, what we′ve seen actually now is that most of the operators have announced cuts to their capex. So that will probably over the next few years reduce growth a little bit from what it was otherwise, but we still think that the fundamentals of the long-term still remain very strong and that this will only be temporary. And that at the same time will actually help some of the companies with cash flows, especially companies that were really in gross mode, like for instance the tower companies, while they′re expanding and building new towers, they are a lot of times free cash flow negative. And so reducing some of the capex is actually, while it reduces growth, actually in the short term also improves their cash flow and their credit metrics. And also manoeuvring currency risks, what is your forecast in terms of how they get around this? Will things get better, especially for a country like Nigeria, I mean 70% since last year, is that going to get better? Yes, so our expectation is that as the interest rate cycle is already turning, that that should be positive for currencies in sub-Saharan Africa and we expect that currencies will be more stable over the next year. And so that should bring inflation down because inflation is to a large extent driven by currency depreciation. At the same time, you have the central bank doing implementing reforms. It′s taking some time but there are some benefits already that are coming through. So another issue in Nigeria is low dollar availability, so that′s also generally weighing on international telco operators. And we′ve already seen dollar availability improve slightly and so that will over time also really be positive. And do you also make, I know this is a sub-Saharan Africa focus, but do you also make comparisons with other regions in terms of how sub-Saharan Africa is performing? Yes, exactly, that′s a good point. So sub-Saharan Africa is actually performing really well if you compare it to other global telcos in higher income countries. So in much of North America, Europe, telcos don′t grow more than 1-2% generally because populations aren′t growing, people already have, everyone has a mobile phone and so people are also already using data services, more data services and voice is actually a declining business at the moment. So there is really not much growth to come plus a lot of competition. So that is really I think that the one factor that sub-Saharan Africa has, has this low penetration, penetration growth and also really a drive for investments. All right, Lisa, we′ll leave it there. Thank you so much for talking to us today. We appreciate your insight and of course the telecoms industry in sub-Saharan Africa. Lisa Jaeger, Vice President and Senior Analyst at Moody′s.

Growth for Sub-Saharan African telecoms operators will be supported by population growth and low mobile and internet penetration rates. That’s according to Moody’s ratings. However, the ratings firm notes currency depreciation have hit operating conditions in recent years, with sovereign risk weighing heavy on credit quality for some key operators. Lisa Jaeger, Vice President-Senior Analyst at Moody’s joins CNBC Africa to unpack the report.

Moody’s: Long term growth for SSA telecos robust despite difficult condition

Growth for Sub-Saharan African telecoms operators will be supported by population growth and low mobile and internet penetration rates. 

Moody’s: Long term growth for SSA telecos robust despite difficult condition

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Moody’s: Long term growth for SSA telecos robust despite difficult condition

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