Telecoms reconsider growth plans

Analysis: The need to build cash reserves raises doubts about heavy capital expenditure among the region's largest telecommunications firms.

Middle-Eastern telecommunications operators are reconsidering their growth plans, analysts say, as the need to build cash reserves raises doubts about heavy capital expenditure. The largest operators in the region have all pushed into high-growth emerging markets in Africa and Asia in recent years. Such markets offer the chance to add tens of millions of new subscribers, but also require big investments in network equipment and staffing.

"If you are an established network that is just expanding its business, that kind of growth will be put on hold for the time being until things unfold," said Shrouk Diab, a telecoms analyst for Beltone, an investment bank based in Cairo. "In a start-up like du, you have to invest in growth. It's a vital investment," she said. "But a lot of mature telecom operators will become cautious about it, and prefer maintenance investments, which will maintain quality. Network quality is a minimum requirement."

The need to preserve cash through spending cuts is not unique to the telecoms industry. But its impact on the way operators manage their growth, particularly in emerging markets, will be significant. In the past decade, billions of low-income customers in emerging economies have got their first mobile line, with network operators willing to invest whatever it takes to get a foothold in future growth markets. In many cases, new customers are spending less than US$5 (Dh18.36) per month on their mobile account, making them only marginally profitable, if at all.

The logic and economic viability of chasing such customers has been called into question by what many analysts and economists are saying is a long-term shift in the global economic growth trajectory. In Egypt, the Arab world's fastest-growing telecoms market, the Mobinil network has announced it would review spending on network expansion with a view to cutting expenses. Its parent company, the Cairo-based regional operator Orascom Telecom, has spoken of similar reviews and reductions in its operations in the Middle East and Asia.

"Orascom will reduce its capex [capital expenditure], especially in countries where they don't think that value attrition is possible due to depreciations in the local currency," Ms Diab said. She believes nations such as Pakistan, where big investments to fund growth are being hurt by a falling currency and political instability, will be hardest hit by a new cautionary environment. Orascom and Etisalat operate networks in Pakistan, but Etisalat was yet to reveal any plan to cut investment into the market, said Alok Nawani, a research analyst at Emaar Financial in Dubai. "It doesn't seem to be doing much in the way of capex reduction, mainly because it doesn't have to," he said.

"Its domestic market generates huge profits. It is in an excellent cash position. I think that their biggest question mark is with the situation in the UAE. A lot of people are leaving the country, and things like overdue and unpaid bills are the kind of issues that might cause problems." In annual results reported earlier this month, Etisalat made an unspecified Dh700 million downwards adjustment, causing a drop in its fourth-quarter results. The company did not reveal the nature of the write-down and has declined requests for comment, but will reveal details in full end-of-year financial statements expected in the coming weeks.

Analysts speculated the adjustment could be related to the company decreasing the value of one or more overseas operations. @Email:[e-mail]