ICT and the Financial Crisis Phillippa Biggs, Economist, International Telecommunication Union 11 March 2009

2 Agenda Origins of the Crisis Is this Crisis any Different? Firm outlook in high-income economies Firm outlook in emerging markets Telco strategy Impact of the crisis on MENA Impact of the crisis on Egypt Agenda

3 Origins of the Crisis Niche origins in US housing market and expansion of high-risk Alt-A & sub-prime mortgages. Sub-prime mortgages rose from <10% in 2002 to 21% of all mortgages in 2006.% Distribution of US Dollar Mortgages, US Housing Association

4 Risk Pooled Around the World Investment banks became exposed through holdings of derivatives mortgage-backed securities (MBS) Source: Bank for International Settlements.

5 Crash, Crunch and Crisis US housing bubble crashed in 2006, making mortgage-backed securities ‘toxic assets’. HSBC announced write-downs of $10.5 bn in Feb 2007, leading to a ‘credit crunch’ & massive decline in inter-bank lending. Financial crisis erupted in mid-Sept 2008 in failure of Lehman Bros & sale of Merrill Lynch. Situation triggered a global economic slowdown - US, EU & Japan now in recession.

6 Is this Crisis Any Different? Origins in credit market, rather than an asset bubble. Crisis originated & spread through systemic failures in financial regulation & banking system. Originated in high-income countries, but its impact is spreading fast. Unprecedented coordination to date in intergovernmental response.

7 But what is the impact of the financial crisis on ICT firms in Egypt and MENA? Source: Sequoia.

8 Firm outlook is bleak… in high-income countries Telcos paying 3-4% more for financing Uncertain consumer demand not yet tested in recession – consumers are wary Need proven business model & cashflows & established credentials to access VC. But return of State funding? Government intervening with investment in broadband in Australia, Italy, Greece, USA and EU.

9 Outlook in emerging markets Demand for mobile largely unaffected, despite softening in some markets Mobile phone services still widely viewed as a necessity. Growth in mobile broadband and Internet looks set to continue BUT… what about the economic backdrop & consumer demand, if emerging markets slide into recession?

10 Telco Strategy Capex, not opex – focus on controlling costs; Consider network-sharing to cut costs; Continue to invest in QoS for the future; Focus on flat-rate & prepaid packages likely to grow, as popular with consumers (impact on profit margins?); Mobile operators more flexible re capex than fixed; Cut debt where possible & focus on refinancing.

11 What implications for MENA? MENA benefits from own sources of finance, including SWFs and homegrown investors Prospects for South-South investment Strong growth potential in mobile & Internet Investment in ICTs could offer a way out of the crisis, but needs to be prioritized. Delays in licenses: Bahrain, Jordan & Lebanon Still a strong potential role as a regional hub - Outsourcing Destination of the Year 2008

12 Growth in Egyptian mobile Source: ITU.

13 Slowing in growth? Source: Informa.

14 Impact on Egypt’s telecom sector Strong growth in mobile projected to continue from 58% in 2008 to 74% penetration in 2009, despite crisis But slowdown in net additions in Q408 (Informa) Most analysts foresee limited impact on mobile usage and revenues. Early signs of a slowdown in fixed-line (BMI) Second fixed-line licence postponed Egyptian mobile in transition - penetration in cities high – how to grow rural market?

15 MobiNil Expecting slower revenue growth in 2009, due to slowing economy; Mobile BB: 200,000 subscribers Oct 2008 Mobinil is forecasting year-on-year revenue growth of about 10% in FY2009, compared with over 21% in FY2008. Mobinil has also stated it will cut its CAPEX in 2009 to US$ m, from $580m in 2008.

16 Vodafone Group Cost cutting – 1 billion GBP cost reduction programme, including cuts in headcount Asia-Pacific and Middle East growing strongly – ‘Egypt is doing well’’, with growth in 3G and advanced services Strengthening its liquidity with bond issuance and effective refinancing Emphasizing customer value, mobile data and broadband services.

17 Fixed Telephony Award of second fixed line licence delayed Telecom Egypt continues to build market share Meanwhile, mobile broadband offers are coming into their own. Impact on the value of the second licence? Timing? Uncertain investment climate?

18 Read more about the impact on the global ICT industry in Confronting the Crisis: Its Impact on the ICT Industry

Thank you for your attention