PYRAMID RESEARCH Africa/Middle East Perspective
Aftermath of September 11th Attacks on US
We at Pyramid Research would like to express our deepest sympathies to all those affected by the horrific events of September 11th in the US. Our thoughts go out to the families and friends of the victims of this tragedy.
Mixed reactions of some countries' governments notwithstanding, US and British strikes in Afghanistan have generally been met with disapproval among populations in the Arab Middle East and a rise in anti-American and anti-Western popular sentiment.
Manifestations of dissatisfaction stand to mount further in light of the US announcement that its military campaign may extend beyond Afghanistan, not precluding strikes on parts of the Arab world, notably Iraq, or the Horn of Africa, notably Somalia.
Some Western corporations operating in the region may bear the brunt of these sentiments, sustaining boycotts and occasional physical threats or attacks on local operations. But the medium- and long-term impact on the region's telecoms market is more complex and will be analyzed below.
THE PYRAMID PERSPECTIVE
Oil-producing nations' economic reform plans to be slowed by financial windfalls and a new emphasis on defense
• In line with economic forecasts by the Economist Intelligence Unit (EIU), we expect that the new crisis will have mixed results on the oil-producing nations of the Gulf region. If oil prices rise, boosting existing current-account surpluses and strong foreign reserves positions in most GCC states, there will be less urgency to push through plans to diversify away from oil and liberalize Gulf economies.
On the other hand, countries such as Dubai and Bahrain, which have pinned their hopes on becoming regional business hubs, are likely to encounter some disappointment as perceived volatility and risk deter international corporations from setting up shop there.
Tourist revenues to suffer in eastern Mediterranean and North Africa
• People traffic between the Middle East and elsewhere will fall dramatically in the coming months and may remain low in the years ahead. Western governments are likely to reduce Middle Eastern immigration quotas and make the acquisition of entry visas of various types more difficult.
The Middle East will decline in popularity as a tourist destination, harming the tourist industries of Egypt, Israel, Morocco, Turkey and Tunisia, and dashing the hopes of other countries in the Gulf, eastern Mediterranean and North Africa currently investing in tourist infrastructure. Some of these losses may be offset by an expected increase in intra-regional religious tourism to countries with major shrines.
Sanctions may be lifted, but FDI is poised to decline
• There is widespread speculation that a period of military strikes in Afghanistan and beyond lasting weeks or months will be followed by a sustained period of coordinated law enforcement activity and covert action targeting urban cells of militant activism globally.
Possible US ambitions to reach deep into Middle Eastern population centers to extract small networks of activists may require a measure of cooperation with host governments that harbor grievances against the US. Among the diplomatic concessions that have been floated vis-à-vis these countries is a lifting or easing of economic and other sanctions, including restrictions on foreign direct investment (FDI).
• In different times, eased restrictions on commercial activity in Iran, Libya and Syria might lead to a marked influx in capital. But circumstances make this possibility less likely. Conservatives in Iran recently moved to block a watered-down law to make foreign investment easier.
Libya is the least likely beneficiary of a political tit-for-tat with the US because it has less to offer logistically in the emerging war. And Syria, although best poised to negotiate terms with the US, is least prepared to offer the legal, educational, communications and economic infrastructure to attract FDI. Countries whose governments are already aligned with the US such as Egypt, Israel and Jordan will find new challenges to attract investors due to changing perceptions of risk and stability.
Privatization and deregulation may stall
• Immediate plans in Turkey, Israel and Morocco, and more distant plans in Saudi Arabia, Oman and Lebanon to deregulate or privatize government telcos are likely to witness further delays. In addition to the likely reduction in FDI to the region noted above, conservative tendencies in the region's governments to cling to telecoms operations as a strategic asset will most likely win the day in this period of uncertainty.
Market entry for foreign telcos likely to witness delays
• Although most companies active in the region will remain in place, it is possible that some companies contemplating entry into Arab markets may cancel or postpone their plans. Oil companies are expected to remain interested in the region, particularly newly opened markets in the Gulf, given the significant potential returns and long strategic view typically taken by industry players.
The corporate culture of telecoms has some parallels with the energy sector, but the industry's global slowdown, coupled with security concerns in the Middle East, are a discouraging combination for potential new entrants to the region.
Local operators to slow deployment of new infrastructure, focus on traditional revenue streams
• In line with an expected trend we noted in Africa last week, operators in the Middle East will likely need to rely more on internal cash flows and less on outside sources for their investments in infrastructure. This in turn will probably lead to a slowdown in the deployment of new communications technologies, particularly those fraught with uncertain demand levels, such as 2.5G mobile networks.
Reduced people traffic to affect roaming revenues, telco strategies
• Mobile operators and telcos in Morocco, Egypt, Israel and other countries hoping to increase international roaming revenues may see weakened growth in this small but lucrative customer segment, due to the anticipated drop in tourism and travel. Plans by some state-owned telcos in the Gulf, notably Saudi Arabia, to hasten corporatization and liberalization by attracting experienced foreign labor from the West may be delayed somewhat by reduced numbers of qualified applicants.
A boon for the region's content providers and ISPs
• One of the Middle East's principle exports has always been front-page news. Heightened global and regional interest in the latest developments in the region bode well for new and old media companies currently in place, particularly those generating unique content.
Web sites and portals across the region report a dramatic increase in hits, and many ISPs are enjoying larger subscriber numbers and increased revenues. Security concerns stand to delay international media companies' ambitions to develop local corporate operations generating unique Arabic-language content, giving local media players an opportunity to further consolidate their hold on their markets.
Demand will sustain market growth in the face of pervasive uncertainty
• Consumer demand for telecommunications services will likely stay strong. However, we expect consumers to incline toward basic mobile services at affordable prices and shun some new applications and value-added services.
Overall, we do not expect global uncertainty to substantially affect subscriber growth in the major markets of the region. We will be maintaining our current subscriber forecasts, which already take into account the inherent economic slowdown in some markets, notably Turkey.
Joseph Braude, Pyramid Research
This Perspective provides Pyramid’s view on a significant development in the communications industry. Perspectives are a component of Pyramid’s Advisory Services.
© 2001 The Economist Intelligence Unit Ltd. All rights reserved. Pyramid Research is a division of the Economist Intelligence Unit
© 2001 Mena Report (www.menareport.com)
