Now’s a good time to exercise patience⌛️
Africa’s second nuclear power plant in view
|May 9|| 4|
Hello Friend 😊
It’s been quite a week, What do you hope we all learn or take away from this experience the world is going through?
For us, we hope to ask less of “Why is this happening?” and ask more of “What does this make possible?”
Now to the stories of this week
Now’s a good time to exercise patience
The current state of things has pushed credit rating agencies - Standards & Poor, Fitch & Moody - to downgrade many companies & countries, with countries in emerging economies feeling the heat the most. Many Countries like Nigeria, Gabon, Argentia, SouthAfrica, Rwanda, moved from having a stable outlook to negative outlook.
And all this is causing a lot of backlash.
What are rating agencies?
Rating agencies provide financial markets with an estimate of the probability that borrowers will not fulfil the obligations specified in their debt issues. The higher the rating, the lower the probability, and vice versa.
Come again ahghen?
Okay. Look at it this way, What’s the difference between a random stranger asking you for a loan and a stranger who was highly recommended by someone you trust asking for a loan?
You might say you see no difference because you have no money to give either way (🌚), but we’d say the difference is the ‘trust’. Credit rating agencies are the people we trust in the business world as they do all the work in vetting a company or country and rate them on how creditworthy they are. Subsequently, they announce their rating to the public for them to decide whether or not to invest. Many companies get rated as often as every quarter after releasing quarterly earnings information.
Why it matters
As usual, there are push backs that the downgrades are too soon and too much as they increase the cost of borrowing for countries causing the supply of international capital to evaporate. Every country could use some extra not so expensive foreign capital right now.
What about the agencies?
Considering the state of things in the world, almost every country and company is getting a downgrade. They’re doing their job, not wanting to be punished for taking sides or misleading the public as they have in the past.
In 2019, Fitch was fined €5.13m for conflicts of interest for issuing favourable ratings, For not issuing appropriate ratings in the 2008 financial crash, S&P paid a $1.5 billion fine while Moody paid +$16M fine.
If the theme of last week’s happenings was the dilemma African leaders face, then this week’s about the dilemma business owners face. The easing of the lockdown came along with multiple businesses around the world - Uber, Airbnb, Andela, Equity Bank Kenya, Access Bank - laying off staff in the bid to make it through this phase.
There’s been a lot of outcry against companies, who one minute are donating to the fight against COVID & the next sending staff home.
Case in point: Access bank donated N1B ($2.6m) to government, but what’s N1B to Access Bank and what does it cost to pay its staff.
Access Bank’s performance in 2019: Made a profit after tax of N97.5B (~$250M), out of which it paid back investors N17.77B (~18%) as dividend. It lost N335M to fraud & forgeries. Clearly, N1B isn’t much.
How much did it spend on staff: Total personnel expenses was N76.96B (~$197M)with N73.1B being Wages & Sales.
In response to layoffs from Banks, the Bankers’ committee tried to bring a message of hope by saying banks shouldn’t fire employees but it all crumbles because of the following clause: the express approval of the Central Bank of Nigeria shall be required in the event that it becomes absolutely necessary to lay-off any such staff. What does absolutely necessary mean?
This raises up the question, “What’s next for businesses?”
We’d not dabble into any philosophical argument right now as any business leader would answer this by simply saying the next step is to stay alive. Do whatever it takes to stay alive.
Looking forward: While layoffs are prevalent as companies look to survive, it’s not all that’s happening. Here’s a reminder from Mark Zuckerberg:
I have always believed that in times of economic downturn, the right thing to do is to keep investing in building the future, and I believe this for a few reasons.
First, when the world changes quickly, people have new needs and that means that there are more new segments to build. Second, since many big companies will pull back on their investments, there are a lot of things that wouldn’t otherwise get built, but that we can help deliver. And the third, I believe that there is a sense of responsibility and duty to invest in the economic recovery and to provide stability for your community and stakeholders if you have the ability to do so.
How Telecos are doing right now
The pandemic induced lockdown has brought about changes in consumer behaviour especially in relation to Nigerian Telecommunication services. These Telco providers are facing a major challenge in the form of a drop in its major revenue driver, Voice Services. These services include domestic and international calls directly to other telco providers.
So what’s the problem?
It's simple really. Over half of revenues are generated from voice services while internet services/bundles is the second-largest source. Its customers have shifted towards consuming more internet services through the use of apps like Zoom, Microsoft Teams and WhatsApp leading to a decline in revenue generated from voice services.
So here’s the catch
The revenue generated from the increase in the use of internet services does not offset the decline in revenue in the use of voice services.
There’s also something quite interesting at play here. Telco companies face huge costs in having to build and maintain telecommunication infrastructure, combined with an added pressure by its consumers to reduce the costs of data in the country. This is further emphasized because the Internet has become a basic necessity in developed countries. Companies such as Zoom and Whatsapp incur no cost of maintaining telecommunications infrastructure while acquiring a substantial customer base.
The Silver lining: Telco providers such as MTN and Airtel are pivoting towards offering internet services through broadband networks to significantly raise mobile internet users. Reduced regulation by the country’s Central Bank also allows Telcos and other non-finance businesses to offer basic financial services through the Payment Service Banking License(PSB). This authorizes Telcos to offer services such as issuing bank accounts, debit cards and even allow users to make payments, with the aim of providing financial services to the country’s underbanked population. Nigeria’s biggest telco, MTN had its fintech revenue grow to over N11 billion in Q1 2020.
Smartphone: A Shaken Industry
The disruption of global supply chains in no news as major companies across the globe have been greatly affected and, the smartphone industry is not an exception as global smartphone sales plummeted in the first quarter of 2020. Data from analyst firm Counterpoint Research put the overall drop in global shipments at 13 per cent from a year ago.
Some Affected Companies in the last quarter (Year on Year)
Samsung - Declined 18%
Xiaomi - Grew 7%
Huawei - Declined 17%
Apple - Decline 5%
Vivo - Declined 10%
PS: Year on Year is a comparison of figures from a year earlier
Both sides of a coin
Initially, vendors were mostly concerned with how to manufacture smartphones to meet global demand but as governments in major manufacturing countries such as China have started to ease factory restrictions, the concern has shifted to demand, as consumers have started to regard purchasing a new phone as a luxury rather than a necessity.
How’s the African Giant doing?
Transsion, the Chinese manufacturer of mobile phones which owns the Tecno, Itel and Infinix brands has a massive 52.5% of the African phone market. In its case, it may seem that size doesn't matter here as shipping decline is likely to continue in Q2 because three of its major manufacturing countries, India, Bangladesh and Pakistan have implemented lockdowns between March and April.
Zoom Out: There’s a bit of positivity to be gotten from this as lesser-known manufacturers and brands like Realme, Vivo and Oppo could flourish. Vivo already sells more smartphones in India than Samsung. As stores are closed around the world, customers are forced to research smartphone purchases online and identify brands that offer better prices with similar hardware and features as known brands, creating an opportunity for manufacturers without a huge presence in brick and mortar stores to grow their business on a level playing ground.
Africa’s second nuclear power plant in view
South Africa is working on developing a 2,500 Megawatt nuclear power plant envisioned to be completed by 2024.
A little more detail
In order to cut the struggle to meet electricity demands of South Africans, the 2,500 MW nuclear power plant is expected to affiliate with the country’s coal power generating plant which has been inconsistent lately.
However, the project requires market feasibility studies and proper consultation with potential investors to kick off.
South Africa's current power situation
The country is currently running the only nuclear power plant in the whole of Africa, 'Koeberg,' running at 1900 Megawatt and managed by state-owned utility Eskom. The country has been solely dependent on its coal power generating plant. This overtime has caused huge cuts on electricity due to high demand to low supply and that has affected many businesses, prompting the exit of some economic players.
Before now: The project was initially supposed to run starting 2018 but was suspended when the last government worried over the cost implication of the nuclear power project which totalled 9,600 MW, on their dying economy. Eskom generates approximately 46,776 MW, 91.2%, while 4,533 MW or 8.8% is generated from renewable energy sources.
What this means for the economy
If South Africa succeeds at pulling investors into the project, there are high chances that businesses will turn a new growth pattern, more investors will be willing to come in and grow the country's internal revenue as well as increase employment rate.
Zoom out: While many firms are bent on building their own renewable energy power plants because you can’t depend so much on one unreliable source when you can afford to have more, the South African government is taking a step further to curbing electricity problems and to grow the economy starting from the power sector.
A survivor's tale: Confused At First, Then Proud To Be In This Country
Quote of the day
You don’t make progress by standing on the sidelines whimpering and complaining. You make progress by implementing ideas.
– Shirley Chisholm (an American politician, educator, and author)
Thank you for reading this week’s edition 💙