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Junked

What does SA's rating downgrade mean for the local IT industry? 

123RF

 

Channel players need to re-examine their business models and prepare for tough times ahead, as the effects of the country’s recent ratings downgrade start to flow into the economy and through the IT industry.

The rand remains under pressure, economic growth and business spending is muted, investor confidence shaky, and our shortage of skilled, senior IT resources seems only to worsen in times like this.

When discussing the effects of the downgrade on the industry, Mark Walker, associate VP for sub-Saharan Africa at International Data Corporation (IDC), immediately highlights the exchange rate. “The long-range view seems to be that the rand will continue to weaken, reflecting diminishing business and investor confidence,” he says.

“We're largely an import-based technology industry, highly reliant on the dollar and other international currencies. Distributors, resellers, and retailers will be forced to pass on price increases to their customers, as their margins are already so thin, it’s impossible to absorb these increases.”

Sitting on cash

Walker adds that exchange rate volatility will be 'even more profoundly felt' in the consumer hardware space, where the man on the street is directly affected by price changes.

But Izak Odendaal, research analyst at Old Mutual Multi Managers, believes consumer technology sales will, in fact, remain fairly buoyant, as South Africans clamour for the latest gadgets. It’s in corporate ICT spending that Odendaal expects to see a pullback.

Businesses in this environment focus more on cost-efficiencies than on expansion, he argues. “They’re adopting a wait-and-see approach, and spending less on business services such as IT,” he says.

Added to this, Odendaal notes that many large South African corporates are investing in assets and buying companies in other countries, as something of a hedge against domestic instability. This further reduces the pool of funds available for the likes of major IT programmes.

This sentiment is shared by Real IRM’s CEO Stuart Macgregor. Specialising in enterprise architecture services and training, Real IRM is directly exposed to international software and other licensing costs.

“One of the implications (of the ratings downgrade) is that larger corporates tend to sit on cash, as the general risk climate increases,” he notes.

Walker adds that there’s also a risk of retrenchments across the ICT industry, as technology purchasing cycles slow down, hampered by the broader economic climate.

Understanding junk status

But to truly understand the impact of subinvestment grade, or junk status, let’s move past the media hype, the scare-mongering and the political strife. Odendaal notes that the downgrade is essentially an opinion, held by ratings agencies on behalf of the investor community, about the South African government’s creditworthiness.

“The opinion they’ve expressed is primarily due to three factors,” he explains. "Subdued economic growth forecasts, the government’s exposure to debt via state-owned enterprises, and the increase in government indebtedness over the past few years.”

The fear that borrowing costs would surge has not yet materialised, notes Odendaal, as lenders had already priced downgrade risks into the bond market prices, and as the broader global economy trends back towards more stable and positive rhythms.

Focusing the mind

Against this global economic backdrop, and as commodities prices recover from their recent lows, he says that investors are once again returning to emerging markets. South Africa’s inflation levels appear to be under control (many feared it would career out of control), and the exchange rate – though volatile – hasn’t yet seen any lasting effects from the downgrade.

So all in all, the impact of the ratings downgrade hasn’t been as severe as we initially feared.

However, says Walker, tensions in the economy will spur accelerated structural changes within the sector, and transformations within IT companies.

“Many of the traditional channel players have already started to seriously re-examine their business models – taking steps to try to cope with the different demand and supply dynamics,” he says.

“There’s a shift away from being hardware box-droppers, software installers and lower-level technology providers, as firms move into services-based models and find ways to add increasing value on top of these services.”

Walker says the industry may previously have been somewhat comfortable, but with today’s pressures, it’s likely to become far more competitive.

Channel players, he adds, should increasingly look to invest in the skills of their people, and in evolving their workforces to compete at a higher level.


Chinks of light in the tunnel

Macgregor also sees a number of positives as the economy continues to tighten, saying that it forces industry players to focus their minds, sharpen their strategies, and become ever-more resourceful.

“When times get tense, there’s a tendency to lapse into a predefined way of thinking, but now we have a great opportunity to fight that. You actually must fight it. The rules have changed.”

Macgregor points to rapid advances in the likes of cloudbased architectures and cognitive computing, as ways in which alternative thinking could crack open incredible new opportunities for forward-looking businesses.

Odendaal agrees that tough times tend to create great opportunities for businesses that are, themselves, tough enough to make it through.

Predicting how long we’ll be classified as 'junk' by the ratings agencies is very difficult to do, he says, but points to the ANC election at the end of this year as a pivotal moment that has a definite possibility of lifting business confidence (à la the ‘Trump effect’ in the US).

The GDP stagnation was caused by a confluence of many factors, says Odendaal, listing drought, strikes, a weak rand, food prices, low commodities prices, power failures, and even visa issues affecting tourism. Many of these issues have now softened, or disappeared, which points to a more optimistic future ahead.

For IT channel players, these glimmers of hope are important to cling to, as we hunker down for a difficult period likely to be marked by constrained demand and continued input price pressures.

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