SA to withstand global IT decline

The local IT market could weather the international financial storm better than its foreign counterparts, says BMI-TechKnowledge, while Gartner has issued its “worst-case scenario” for the sector.

According to the international research firm, the world financial markets turmoil could cause a sharper slowdown in economic growth than had been expected. However, because IT spending in the first two quarters of this year had been healthy, even a sharp decrease in the last three months would hardly hamper overall growth for 2008.

Gartner's worst-case scenario assumes that the current credit crisis triggers a full-blown recession in the US and Europe, and that government remediation attempts are insufficient to prevent a slowdown.

In the worst-case scenario, a sharp turndown could see the IT market's annual global growth drop from an expected 8.9%, to 7.3%, and the possibility of spreading economic problems in 2009 would reduce the forecast from a growth of 5.8%, to 2.3% for that year.

Clinton Jacobs, head of IT products and services research at BMI-T, believes there will be less impact on revenue forecasts in SA than on profit margins, and it is the latter factor that vendors will be hardest pressed to bear.

Earlier this year, BMI-T forecast the overall IT market to grow by 11.8% in 2008 and 6.9% in 2009.

“To some extent, this forecast already factored in the general economic downturn and exchange rate slide that had begun to manifest itself in the first half of 2008. However, the last events, including the dramatic slide of the rand, have an upwards impact on pricing of imported components, which almost balances out the negative impact on revenue forecasts due to slowing sales volumes,” Jacobs says.

He points out that in the highly price-sensitive consumer and SME markets, vendors will not be able pass on the full value of the price increases. The real issue is how even more margin will be sacrificed in an already tight consumer environment.

“The National Credit Act has lessened the credit crunch issue in SA, since we already have more disciplined credit granting. In some markets, notably telecoms equipment such as PABXs, vendors have already changed capex into operating expenditure by offering a rental model for a two-year contract, thus further lessening the impact of a heightened credit squeeze,” Jacobs notes.

He explains that unlike the consumer and SME market in general, South African IT vendors also have the buffering effect of massive government and SOE expenditure, which is almost entirely immune to business confidence and credit squeeze issues.

“Due to structural differences in the makeup of the market, SA will not be the worst case within the global markets, by a long shot,” Jacobs says.