With
the current US liquidity crisis threatening to take global financial markets into
a downwards tailspin, we conducted an informal –and unscientific- survey of a
small number of Africa-focused fund managers and other others directly involved
in African project finance to get their assessment of the impact of the crisis
on the African TMT space. We asked three questions:
(1) How
does the US liquidity crunch impact the availability of equity (or debt)
capital for African transactions?
(2) What
do you see as the impact of the current crisis on African TMT deal-flow over
the next 6 months?
(3) Do
you see the African TMT space as insulated from a potential global economic
downturn?
It
should be noted that we expect the US Congress to eventually pass a “rescue
plan”. This should help alleviate some of the crunch, but the bank failures of
the past few weeks will have some lingering effects. Below are some extracts of
a client research note summarizing some of the views we gathered, mixed in with
some of our own analysis.
- The fundamentals of the African TMT space remain strong: From a pure fundamentals standpoint, the African TMT market is perceived as largely impervious to a major global economic downturn. Demand for basic voice services remain strong – “inelastic”, some argue- , and most projects remain bankable.
- This, however, may be one of those instances where fundamentals matter little. With regards to the availability of debt financing, two-thirds of the respondents to our survey agreed that the US liquidity crisis would have a direct impact on African TMT markets. For one, all the world’s large commercial banks are in the process of cleansing their balance sheets of any loans than are either toxic or perceived as too exotic. There is the perennial “flight to quality” that typically accompanies market volatility and rarely, if ever favors African markets. African banks with credit lines in Western markets may see them tightened, if not frozen. A number of markets (e.g. Nigeria, Kenya) are already facing their own liquidity issues, though those appear only remotely linked to the US crunch.
- Bring back the DFIs: as lenders become more risk adverse, the cost of
capital will rise. Banks will lend to service providers that are sure bets and
hold back on everybody else. First tier players (e.g. Safaricom, MTN) will have
no issues getting financing. WiMAX providers
and other fixed or mobile third tier players will have to look for alternative
options; the most notable outcome of the liquidity crunch may well be the resurgence
of vendor financing and Development Finance Institutions (DFIs).
- The market is set to see fewer highly-leveraged transactions. Nonetheless, equity investments originating in the Middle East should be affected only marginally.
Extracted
from An AfricaNext Research Note: The US Liquidity Crisis, African TMT markets and
the Demise of the Decoupling Theory
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