South Africa's ICT sector is very likely to experience job loss as a result of the fallout from the recent credit rating downgrades, the increase in inflation and the related increase in cost of investment, importing and funding, according to Mark Walker, Associate Vice President for Sub-Saharan Africa at International Data Corporation (IDC).

Walker explains that South Africa's technology sector is a mostly sales-driven environment, and if the sales aren't there, profitability is reduced and that means companies cannot afford to sustain their workforce – which leads to retrenchments.

"South Africa gets downgraded, the demand for ICT goods and services is impacted because the cost of these goods and services is now proportionally more expensive... companies find ways to extend the lifecycle of existing agreements and existing equipment and this slows down the purchase lifecycle," he says.

However, the exact timing and magnitude of the layoffs is difficult to predict, says Walker, but the likelihood is that it will impact the IT production, services and supply areas of the sector significantly.

According to ICASA figures, South Africa's ICT sector is 335,000 strong (excluding end-users), including approximately 120,000 within software/ services and 103,000 within telecoms.

The ICT sector contributes between US$100m and US$120m or roughly 3,5% towards the national GDP.

With this in mind, and the country's unemployment figure at 26.5% during the last three months of 2016 (according to tradingeconomics.com) and inflation currently at around 6%, the downgrade of South Africa's credit rating to 'less than investment' or junk status by rating agencies S&P Global Ratings and Fitch, will have an adverse effect on the ability to source funding and import equipment.

"What does a lower rating mean? It basically means that access to capital, access to funding is going to become more expensive. At a macro-economic strain level, if a country is looking for money for investment from African Development Bank or foreign investment agencies, because of the downgrade, South Africa's investment is seen as being more risky – and risk carries a premium and that is reflected in the interest rate. This is further compounded by reflection in the exchange rate," says Walker.

Essentially this means that imported technology, and South Africa imports most of its technology, is going to become significantly more expensive, Walker adds.

This cost will also filter down to adoption and affect the management of technology infrastructure. Businesses will split their budgets into opex and capex and use this to purchase new technology to replace end-of-cycle infrastructure and factor in the people cost with the adoption of cloud services, renewal of software licenses, etc.

The mobile phone handset market segment aside, the corporate sector is the biggest spender when it comes to ICT and these corporates are expected to become more vigilant in terms of IT costs and budget allocation.

These businesses will look to save money by either extending lifecycle of existing equipment, especially hardware, or they will renegotiate the terms of their existing licensing agreements.

As businesses within key sectors tighten their belts in terms of IT spend, it will be the service providers and hardware/software tech suppliers that will be adversely affected.

Global cuts

The IDC executive refers to retrenchments that impacted the global ICT sector in 2016, with several major operators announcing job cuts including Intel, Microsoft, HP, IBM and Cisco.

In June 2016, ITWeb reported that Telkom experienced a 25% drop in full-year profit after tax having spent approximately R2.2bn on staff cuts, with around 4 200 employees accepting voluntary severance and voluntary early retirement packages.

A year earlier the telco had announced the intention to shed 7 800 jobs, including 3 400 employees to be transferred to outsourced companies.

At the time, telco analyst Dobek Pater said that many telcos had been going through retrenchment exercises as part of their cost-cutting measures.

He was quoted as saying the situation could "possibly result in telcos being ultimately able to access lower-cost labour (technical / other) in the future or in the form of consulting / outsourced services. A portion of the retrenched personnel will no doubt remain in the telecoms sector and provide external services to the telcos / service providers."

Many of the cuts impacted the US and Europe primarily, and to a lesser extent the India and Asia regions.

"In late last year, one of the equity researchers predicted 335 000-odd layoffs in the tech industry by the end of 2016 up to mid- 2017 worldwide," said Walker.

He explains that when an international company restructures, the layoffs are felt worldwide but the process takes longer to impact markets further afield. For example, the restructure will happen in the US, there will be layoffs and this will then cascade into other regions in the world.

South Africa's ICT contribution to the GDP is relatively small, so any layoffs will be proportional – but, as Walker explains, the reality is that the ramifications of global corporate restructure activity last year will start to be felt more acutely in other regions and given South Africa's current economic predicaments, the ripple effect could now be a lot more severe.

GCI Index 2017

According to the Huawei Global Connectivity Index, which reflects the progress of 50 countries in terms of digital transformation, South Africa was ranked in 31st position.

South Africa was the only African country to be included in the 'Adopters category' or countries with an average GDP per capita of US$15,000 and focused on increasing ICT demand to facilitate industry digitisation and high-quality economic growth.

Egypt, Morocco and Algeria are in the starters cluster, or those countries with an average GDP capita of US$3,000) and in the early stage of ICT infrastructure build-out, and focus on increasing ICT supply to give more people access to the digital world.

"South Africa has performed at average levels in terms of broadband, data centres and cloud services. However, its Fibre to the Home and fixed broadband fell behind. This could hinder further development in usage of data and cloud services. On the positive side, South Africa recorded improvements in 4G coverage and overall mobile broadband penetration. It is expected to have the highest ICT spend, $10.5bn, across the Middle East, Turkey and Africa (META) regions in 2017," according to the study.