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Adam Solomon is a specialist in business foreign exchange issues at foreign exchange brokers TORfx.

The idea of this column is to assist businesses in saving money on making or receiving payments in foreign currency. It is developed with all companies in mind from public companies with large and complex operations, to smaller companies and individuals.

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An investment opportunity - African telecoms PDF Print E-mail
Written by Eric Güller, Equity Research, Robert Ruttmann, Equity Research at Credit Suisse AG   
Wednesday, 04 November 2009 14:09
800 million African subscribers by 2014.

mobile tower


Eric Güller, Equity Research, Robert Ruttmann, Equity Research at Credit Suisse AG

Africa remains the fastest-growing mobile telecom market in the world, with telecom firms adding around 90 million new subscribers in just the last year – an amount equivalent to the German population. And despite this enormous growth rate, the region still offers significant opportunities for growth since only 4 of every 10 Africans have access to a mobile phone today.

Indeed, Africa's mobile penetration rate of only 40 percent (number of mobile subscribers per 100 people) across a continent of 1 billion people translates into around 600 million potential subscribers. This suggests that the mobile market in Africa is just beginning to get out of its starting block. And with the mobile market essentially leap-frogging the more expensive African fixed line systems, the mobile phone has become the foremost telecommunications service in Africa.

The Importance of Mobile Telephony in Africa


The reasons for this rapid growth in mobile telephony are manifold. In many instances, African phone usage is not merely a luxury or convenient alternative to reliable fixed-line services (as it is in developed economies), but a veritable necessity.

This is true especially in the case that mobile phones make up for poor or inexistent infrastructure in many African markets. For instance, a mother with a sick child at home can call to see if a doctor is available in the neighboring village before beginning the journey on foot.

But having access to a mobile phone also allows for the more efficient, unencumbered flow of market information between traders and their customers in Africa. In this case, mobile phones typically help make markets more efficient, bring prices down, and increase productivity by allowing more people to be integrated into the mainstream economy via their mobile phone. For instance, a plumber does not need to loose time by returning to his shop to pick up messages or a carpenter or auto mechanic can advertise her services on notice boards and ask potential clients to get in touch with her via phone.

Business Banking via Mobile Phones


Also, Africans increasingly use phones to transfer money or pay bills. This innovation makes up for the limited banking facilities and branches in most African markets. For example, Safaricom, a Kenyan wireless provider, launched a mobile-money-transfer service called M-Pesa ("mapesa" means "money" in Swahili), which allows Africans to send money by text message to their friends, family, or trade partners. The recipient can then take the text message to a local M-Pesa agent and withdraw cash.

These examples of the very important role mobile phones in Africa have come to play on an everyday basis are also supported by the high proportion of household income typically allocated for mobile phone services (in some countries like Ruanda beyond 25 percent of income is spent on mobile services). This high proportion of income used for mobile telephony suggests that people in Africa really do see mobile telephones as nearly invaluable parts of their everyday lives.

African economic growth drives mobile phone penetration


But many sceptics of the African Mobile Phone Revolution may contend that Africans earning only a dollar a day can't afford a cell phone. And while African consumers may indeed include some of the world's poorest people, the robust economic growth of around 6 percent per year Africa has registered since the turn of the century is putting more disposable income into the pockets of more Africans.

And while the reverberations of the financial crisis continues to hinder Africa's near-term prospects, many African countries are better positioned than ever to resume their growth trends as the global economy recovers. In fact, the IMF expects African growth to continue outperforming world growth, as the global economy begins to recover in 2010. This robust economic outlook for Africa is likely to serve as a further driver for increasing mobile phone penetration across the continent.

And a growing economy typically has two effects on an emerging market telecom industry. First, with rising income, new subscribers tend to enter the market as telephony becomes more affordable to more people. And second, as incomes rise, existing subscribers typically spend more on their existing telecommunications services. Both effects are likely to support the growth of the African telecom market as companies compete to benefit from these prospects. But the pendulum also swings the other way.

Incomes rise with the access to mobile phones


Not only is economic growth likely to drive mobile subscriber growth, but it could also increase mobile usage. This higher mobile usage and the accompanying economic efficiencies created it carries with it could in turn further stimulate economic growth - creating a self-perpetuating cycle of growth. In fact, several studies have confirmed that people's incomes typically rise when they gain access to a mobile phone.

For example, a well-known 2007 study from Harvard University tracked fishermen off the coast of southern India, finding that when they started using cell phones to call around to prospective buyers before they'd even got their catch to shore, their profits went up by an average of 8 percent, while consumer prices in the local marketplace went down by 4 percent. Building on this theme, a 2005 London Business School study concluded that for every additional ten mobile phones per 100 people, a country's GDP rises 0.5 percent.

This effect suggests that mobile telephony in Africa can reduce the "poverty penalty" – the high prices poor consumers are forced to pay due to economic isolation - by introducing fairer, more transparent market pricing to consumers and producers, and in so doing stimulating economic growth in what can develop into a virtuous cycle of long-term growth.

Benefits beyond the economic aspects


But apart from the economic benefits mobile phones offer, they also bring political and broader social benefits as well. For example, the Economist has reported that FrontlineSMS, a system that allows groups to communicate via text messages in Africa, is being used to report human-rights violations and co-ordinate aid and conservation projects. And mobile phones have also been used for political processes such as election monitoring in countries including Nigeria, Kenya and Sierra Leone. This works because the phones are used to report vote totals directly from polling stations to radio stations, which makes it more difficult to manipulate the results later in the process.

Outlook: 800 million African subscribers by 2014


In the final analysis, African long-term prospects are likely to be intricately linked to the increasingly meaningful and empowering role the mobile phone continues to play in African society. Looking ahead, we expect Africa penetration rates to converge to the 100 percent level, reaching 80 percent by 2014. This represents an additional 350 million subscribers from today's levels – an amount larger than the US population. With these attractive growth prospects, the African telecom market may yet become the forerunner of a broader African development story already silently in the making.

 

 

 

 
Last Updated ( Wednesday, 04 November 2009 14:29 )