Digital Transformation in Emerging Markets: Opportunities for Credit Investors in African Digital Infrastructure

Today’s emerging markets pose a very different proposition to those of ten years ago.  Historically there has been a strong association with commodities, and while this relationship still exists, markets have advanced, broadening the investment opportunity set significantly.  As fixed income investors, we are particularly interested in the potential of mobile comms, propelled by the fast-spreading digital revolution, which over the last couple of years has accelerated despite the pandemic causing the global economy to contract by 3% in 2020.

Emerging markets are adopting technology at increasingly lower costs, driving domestic demand and growth previously reliant on export-driven economies. Internet access has improved in reach and quality, transforming the connectivity landscape during the past decade, which has seen the number of internet users doubling in G20 nations and highlighting the largest gains from emerging nations such as Brazil and India. 

Today there are more than 4.6 billion internet users across the globe, and over the last decade, one billion of these users are now online for the first time.  Internet usage has seen a global transformation, with the majority of internet users now living in emerging markets.  Digital technologies have grown rapidly in these regions by innovating, and also adopting ideas previously spearheaded in other continents where funding was readily available. 

For example, multinationals like Uber, Google and Amazon, who are now facing competition from successful local service providers with an online presence in countries as diverse as Kenya, Ukraine and Argentina.  According to Boston Consulting Group since 2014, more than 10,000 tech companies have been founded in emerging markets, half of which are from outside China. 

This timeframe demonstrates an evident shift towards tech and internet in the major market constituents of the MSCI emerging market equity index and other indices as the sector grows in importance.

Mobile connectivity has been integral to internet penetration growth and digital advancement.  While smartphone sales in more developed markets may have slowed due to high penetration rates (i.e., 85% in the US), growth is notable in emerging markets where smartphone penetration rates are still relatively low (e.g., 60% in Mexico and 41% in sub-Saharan Africa).  

Despite the relatively low penetration of emerging markets, the absolute user numbers are still impressive, with a total of 1.8 billion mobile internet users, compared to 500 million in the US and Western Europe.  With a combined GDP of USD 36 trillion, emerging markets demand close attention. While Western companies emphasise ‘mobile first’ strategies (referring to decisions to shape their business with mobile users as a priority), for emerging market companies, the focus is on ‘mobile only’, given that a significant number of people are more likely to access a smartphone rather than a desktop computer.

For some of us, life through the pandemic would have been inconceivable without the ability to learn, work and socialise online. However, the stark reality is that not everyone has been able to make the switch to digital – with only 53% of the global population having internet access. The fact that smartphone penetration in emerging markets is lagging the global average has been recognised by both local-country telecommunications providers as well as foreign-controlled joint ventures. Both sectors are actively targeting these population segments for their next wave of growth, investing heavily in physical infrastructure such as fibre-optic cables and telecommunication towers.

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