Telcos slow network investments to reduce FX losses

MTN Nigeria Communications Plc and Airtel Africa Plc have reduced investments in network infrastructure to focus on minimising foreign exchange (FX) exposure and managing rising operational costs.

This was detailed in their financial statements for the nine months ending September 2024. Their strategy aligns with earlier forecasts of decreased capital expenditure (capex) due to foreign exchange (FX)-induced losses in 2023 and 2024.

In recent weeks, Nigeria’s network quality has declined, a situation that Gbenga Adebayo, the chairman of the Association of Licensed Telcom Operators of Nigeria (ALTON), attributed to reduced investments in the sector.

GSMA, the global telecom body, has warned that lower capex could lead to a shrinking telecom sector, resulting in poorer service quality and slower coverage expansion.

“The overall financial performance of the industry in recent years has not been sufficient to support the capital-intensive nature of the business,” it said.

Karl Toriola, chief executive officer of MTN Nigeria, recently noted that investments would not flow into a sector that cannot promise returns. “We are in a big crisis,” he said.

MTNN’s core capex spending fell by 27.79 percent to N217.64 billion from N301.38 billion year-on-year (y-o-y).

“Excluding leases, our core capex declined by 27.8 percent, resulting in a capex intensity of 9.8 percent on this basis. The optimisation of core capex enabled us to accelerate the reduction of forex exposure arising from our LC-backed obligations and its impact on the business,” MTNN said.

Airtel Nigeria’s capex fell 36.59 percent to $149 million in the first nine months of 2024 from $235 million in the corresponding period of 2023.

“Operating free cash flow was $163 million, up by 73.7 percent in constant currency, largely due to the constant currency EBITDA growth and lower capex while in reported currency,” Airtel said.

This slowdown coincides with reduced revenue earnings for Airtel and reported losses for MTNN. A Central Bank of Nigeria (CBN) unification of the foreign exchange market in June 2023 triggered a sharp devaluation of the naira, which plummeted from N471/$ before the move to N1043.09/$ by December 28, 2023, and N1676.90/$ by November 4, 2024.

Airtel Nigeria’s revenue fell 46.9 percent to $755 million, while MTNN’s losses increased from N14.99 billion to N514.93 billion, despite service revenue growing by 33.7 percent to N2.37 trillion.

Over the last two years, MTN has spent N1.08 trillion on capex, with Airtel Nigeria spending $545 million in the same period. Both declared FX losses of $1.56 billion in 2023.

Beyond FX losses, surging energy costs have also strained the operating budgets of telcos.

“Average diesel prices in Nigeria increased by approximately 90 percent compared to the prior period,” Airtel stated.

MTNN’s operating expense increased by 95.87 percent to N1.13 trillion from N575.46 billion.

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Adebayo of ALTON identified energy costs as the telecom industry’s largest constraint. Carl Cruz, Airtel Nigeria’s CEO, pointed out that increased operating costs are outpacing revenue growth, causing investors to be cautious.

Telcos anticipated this slowdown in their outlook for 2024 as they took measures to reduce their dollar liabilities to mitigate a tougher operating environment. They decreased foreign loans, started bulk-paying for FX-denominated inputs, and renegotiated contracts.

MTN and Airtel reduced their foreign loans to $57 million in September 2024 from $966.6 million in December 2023.

MTN noted in its Q1 2024 report, “In this regard, we plan to reduce capex (excluding leases) for FY 2024 and aim for a capex intensity in the upper single digits.”

Airtel Africa added, “Having considered all the above-mentioned factors impacting the Group’s businesses, the impact of downside sensitivities, and the mitigating actions available to the group including a reduction and deferral of capital expenditure…”

These investment cutbacks could hinder the growth of internet usage in Nigeria. According to the Nigerian Communications Commission (NCC), data usage grew 30.2 percent y-o-y to 850,249 terabytes in September, while smartphone adoption surpassed feature phone use for the first time.

Despite scaling back capex, telcos expect to resume investments as FX pressures ease.

“Additionally, the demand for reliable, high-speed internet connections continues to grow, particularly among SMEs and households in urban areas. We are investing in expanding our fibre footprint to capture growth within the segment,” MTNN said.

Airtel Africa, the parent company of Airtel Nigeria, expressed similar optimism, highlighting that “the opportunity across our markets remains substantial.”

“The service providers will continue investing in digital infrastructure to support the digital economy in Nigeria, provided that the economic and regulatory environment improves in a way that supports sustainable investment,” GSMA added.