Are African mobile markets insulated from economic slumps?

Are African mobile markets insulated from economic slumps? At times, that certainly seems to be the case. Take Nigeria. Since 2016, the Nigerian economy has averaged ~1% annual growth, its worst stretch of performance for at least a decade. Over that same period, the country’s mobile industry growth has averaged between 10% and 13% annually. In South Africa, another beacon of dismal economic performance, mobile sector growth has been running ahead of revenue by 2-3 percentage points.

For additional insight, we analyzed mobile sector and GDP growth data from 30 markets in Africa, covering the 2010-2019 period. You can see an interactive version of the data in our visualizations here.

Lagos Market v.1

1. African mobile markets are, on the whole, not insulated from their broader economic context. Mobile sector revenue growth largely dovetails real GDP growth (see chart). Since 2013, the differential between the median revenue growth and the median GDP growth in our 30-country sample has been no higher than 3 percentage points, indicating at a minimum an indirect relationship.

On the surface, this would make sense. As a predominantly consumer-facing industry, the evolution of mobile revenue should mirror consumer sentiment. If consumers are feeling positive, the industry’s top line would presumably reflect it. In practice, things are not that simple. There are notable differences between African regions and countries, in how closely (if at all) industry growth follows economic growth, and around the nature of the relationship between those two indicators.

Africa median real GDP vs. median mobile services growth*

*Based on a sample of 30 markets – See regional breakdown here. – Source: Xalam analysis

The positively insulated

2. Some countries (let’s call them the “positively insulated countries”) have a positively correlated relationship between mobile sector growth and GDP growth. When the economy is expanding, the mobile market is booming. The differential between sector growth and GDP growth is high, with sector revenue typically 3-5 percentage points ahead of GDP growth.

When the economy is struggling, the market’s growth curve is flatter – revenue is still rising, but the differential between the two curves falls to 1-2 percentage points. Markets in this group are mature in penetration terms and in the growth stages of mobile broadband and digital service adoption. Southern Africa, for example, has Africa’s best positive differentials between industry growth and GDP growth. Markets in that region have historically outperformed their underlying economies. Kenya and North African markets also fall into this group.

The neutrally positive

3. Another group of markets has a “neutrally positive” relationship to GDP; sector performance is entirely decoupled from economic performance. GDP growth (while nice to have) doesn’t matter that much to mobile sector growth (barring, of course, deep structural shocks). If the economy does well, sector revenue will boom. If the economy is struggling, sector growth will still be strong anyway. Intrinsic industry factors are driving growth, and demand is deep enough to make up for a soft economy.

Markets in this cohort are typically at an early, growth stage. Indeed, most African markets fell in this group prior to 2013, which may have led many politicians to believe the industry could be taxed at will without negative impact. They were wrong. Today, the only markets to qualify as “neutrally positive” are Ethiopia (if it gets its sector regulations right) and potentially the Democratic Republic of Congo.

The negatively impervious

4. Conversely, a third group of countries is “negatively impervious” to GDP growth. They underperform when GDP growth is positive and do even worse when there is a slowdown. The structure of the economy and the broader regulatory environment are central to this scenario. Markets with a broader, service-driven GDP base perform better than economies that are predominantly resource-driven. An open, dynamic and competitive market allows sustaining growth even when the broader economy is slumping.

By contrast, a constrained regulatory environment doesn’t allow to fully take advantage of the highs, and in times of economic pressure, makes things worse. Markets in Central Africa, for example, are negatively insulated from underlying economic performance. They don’t partake in positive growth but feel the inordinate impact of economic recessions – and this is despite sporting lower service penetration levels (and presumably more growth upside).

Key implications, from Nigeria to Ethiopia

5. So what does this all mean? First, some caveats are in order. The above analysis is focused on top-line revenue at market level; some individual operators do outperform, or do worse than the market.[1] In addition, our analysis only takes into account mobile services, which are consumer-focused. Enterprise and wholesale markets present a different profile, which we will explore in a separate note. Finally, the above analysis doesn’t account for operating income, net profits or free cash flows – those curves behave in different ways.

The above caveats notwithstanding, our analysis suggests that leading operators in markets such as Nigeria and South Africa will likely continue to do well in spite of slower GDP growth (and of course, they’ll also benefit from some of their smaller competitors falling off).

[1] In South Africa, for example, top-2 mobile operator growth is flat, in line with the economy; the growth comes from the bottom-tier of the market. For Nigeria, it is the reverse; top operators drive growth, while the bottom-tier bears the brunt of a tougher economic context.

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