Costa Rica Telecom Overview

In a nationwide referendum on October 7, Costa Ricans approved a free trade pact with the United States through the Central American Free Trade Agreement (CAFTA). What does approval of the agreement mean for Costa Rica’s telecom sector? Will we see a flood of foreign telecom investment pour into the country? Will state-owned ICE continue to dominate the telecom sector for the foreseeable future?

Vicente Lines, Partner at Arias & Muñoz in Costa Rica: Costa Rica must first approve legislation to free ICE from restrictions in management of procurement and financial affairs. As part of a clever political compromise, strengthening ICE would allow the creation of a regulatory framework. The private sector has been marginalized in the telecom sector due to a lack of regulation. Sadly, CAFTA’s framework does not immediately open the floodgates to telecom investment. CAFTA only opens three sectors to competition: 1) closed user group services (or private network services); 2) Internet services; and 3) mobile wireless services. Private enterprise already intervenes through agreements with ICE and its subsidiary RACSA in the provision of private network services. Widespread broadband Internet access has been a reality in Costa Rica for years through the privately held cable television operator, AMNET, and its arrangement with RACSA. It is unlikely the government will license spectrum in the next year. Thus, ICE will command a hefty market share in the short term. Although greenfield investment seems a relatively hard sell, ICE faces challenges upon CAFTA’s implementation. AMNET’s substantial deployment of its HFC (hybrid fiber-coax) network in urban areas makes it a formidable platform for the provision of triple-play services to consumers, and a potentially attractive acquisition target. ICE’s woefully slow customer service and failure in implementing prepaid mobile services and mobile handset financing present an attractive opportunity. The true appeal of the market will ultimately turn on how solid the regulatory framework and related institutions are. This is still an open question, to be partially answered by passage of the implementing legislation.

Wally Swain, Senior Vice President for Emerging Markets at The Yankee Group: Costa Ricans’ majority endorsement of CAFTA has many implications for the country, but telecom may see the biggest change. Despite high technology ratings in World Economic Forum dimensions, the market is complicated by state-owned monopoly ICE. Just one example: ICE has had to stop selling mobile subscriptions because of a lack of sufficient capacity, phones, or both. Complex bidding practices slowed down the provisioning cycle. Corruption is another factor. Allegations surrounding a mobile infrastructure contract awarded a couple of years ago have resulted in an ongoing investigation and several arrests. Finally, strong unions have resisted change, both external—like the CAFTA provision to liberalize the market—and internal. We don’t expect this to improve overnight with the approval of CAFTA; the government still has to get privatization or new licenses approved by Congress, and the political cost will be challenging, especially that demanded by the unions. There will certainly be a line of well-qualified interested parties ready to invest, given the country’s otherwise favorable economic climate and its geographical position in Central America. Telefonica, Telmex/America Movil, Millicom, and Digicel all have interests in nearby markets. Even if ICE doesn’t privatize, Costa Ricans can benefit from new entrants if the scenario plays out as in Colombia and Uruguay. Disappointment will set in if the scenario eventually plays out like Ecuador.

Panos Loukos, Latin America Research Analyst in the Telecoms Practice at Global Insight: In the short term, the approval of the agreement will have limited impact. Global Insight expects that it will take three to four years for the liberalization to be approved and then implemented. As a result, foreign investment will only gradually flow into the Costa Rican telecom sector, with the most likely longer-term investors including Mexico’s America Movil/Telmex and Spain’s Telefonica. ICE’s head start over potential competitors will mean that it will remain dominant for several years. However, its dominance and ownership by the state will hinder technological and service innovation. The experience of other countries has shown that the introduction of competition, foreign investment, and new technologies will benefit both the high-income and lower-income segments. Digicel, which competes against Cable and Wireless in the Caribbean, has successfully won market share from long-standing monopolies on the basis of lower pricing and better branding. (Source: http://www.latinbusinesschronicle.com/app/article.aspx?id=1731).

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Higher Consumer Spending Raises Borrowing, Inflation in Saudi Arabia

According to a recent news, the continuous rise of oil prices in world trading is once again reflected in the robust economic performance of Saudi Arabia, the undisputed biggest oil producer.

The Saudi Arabian Monetary Agency (SAMA) ? the Kingdom’s central bank, said in its latest annual report issued recently, that aside from the record budget surplus of SR290 billion as reported earlier, the country’s gross domestic product (GDP has recorded a growth rate of 10.6 percent to SR1,307.5 billion in 2006. The non-oil sector GDP grew by 6.2 percent to SR588.7 billion, representing 45 percent of total GDP.

Moreover, the non-oil private sector GDP climbed 7.9 percent to SR374 billion. The government sector recorded a 3.4 percent rise to SR214.7 billion.

However, as the economy witnessed a high level of liquidity, consumer spending or personal consumption expenditure as determined by the consumption function, especially by the marginal propensity to consume, has also increased tremendously, affecting the rate of inflation.

As a consequence, total personal consumption expenditure, i.e., the purchase of currently produced goods and services out of income, out of savings (net worth), or even from borrowed funds, has also gone upward.

The cost of living which is interpreted as the cost of maintaining a certain standard of living over time, otherwise known as a cost-of-living index, steadily increased, SAMA report said.

The index is a price index that conceptually measures relative cost of living.

The index is constructed to have a value of 100 in a given year (or period, or place. An index value of 110 indicates that the cost of living is 10 percent higher than in the base year. Thus, the index provides a unit-free measure of the change in the cost of living.

A cost-of-living index is a useful way to determine the effects of inflation to the individual household. It is also helpful in measuring changes in the quality of lifestyle vis-୶is monetary, fiscal, and trade policies.

As the Kingdom imports many products and goods, changes in the world prices affect the cost of living index. Inflation rate in the Kingdom (calculated from the cost of living index) was 2.2 percent in 2006, the report said. However, due to recent global developments, inflation jumped to seven-year high of 4.4 percent in August 2007 amid weak US currency.

The volume of goods exported by the Kingdom in 2006 amounted to SR786.6 billion, while imports were estimated at SR248.4 billion, SAMA said, adding that exports and imports recorded annual growths of 16.2 percent and 11.5 percent, respectively. The wholesale price index, which measures average changes in the prices of goods and services sold in the major wholesale primary markets in the Kingdom, increased by 1.13 percent to 125.6 in 2006 against 124.2 in the preceding year as a result of increases in most major groups comprising the index. Chemicals and related products rose 6.3 percent and the food and live animals group clocked up 3.9 percent hike, the report said. Machinery and transport equipment registered an increase of 3.7 percent, followed by miscellaneous manufactured articles group at 3.2 percent. Vegetable, animal oils and fats group rose by 0.5 percent.

In contrast, mineral fuels and related products group decreased by 10.5 percent, followed by crude materials.

The general cost of living index during the first quarter of 2007 rose by 3.1 percent to 104.1 compared to the same period of the preceding year. Detailed figures of the major expenditure groups indicated that the foodstuff and beverage groups rose by 7.7 percent. Other goods increased by 6.5 percent.

The cost of renovation and rent went up by 4 percent. The medical care cost inched up by 2.1 percent, while furnishing prices rose by 0.9 percent. Prices of cloth and apparels, however, dropped by 1.9 percent, along with the costs of transport and communications that went down by 4.4 percent. Education and entertainment remained unchanged.

The Saudi capital market received a great attention in view of its important role in financing the country’s economic development and its vital role in the success of the privatization program adopted by the government, apart from providing important investment channels that contribute to attracting domestic and foreign capital.

The Capital Market Authority (CMA), the regulatory arm of the government, has licensed 37 brokerage firms and consultation offices stood in 2006, raising the number to 45 by the end of 2006.

In 2006, all indicators of the Saudi share market witnessed a fall. The Saudi share index fell by 8,779.35 or 52.53 percent to 7,933.29 at the end of the year. Total assets of investment funds in domestic and foreign currencies went down by SR52.8 billion or 38.5 percent to SR84.2 billion by the end of 2006, SAMA report said.

Market capitalization declined by 49.72 percent to SR1,225.86 billion in 2006 compared to SR2,438.20 billion at the end of the preceding year.

However, all other indicators of Saudi share market recorded increases during 2006. The number of shares traded in 2006 rose by 11.58 percent to 68.52 billion compared to 61.41 billion in the preceding year after excluding the effect of the split of the shares’ nominal value of all listed companies into SR10 per share instead of SR50 per share in April 2006. This was accompanied by a large increase of 27.14 percent in the total value of shares traded which reached SR5.26 trillion compared to SR4.14 trillion in the preceding year. The number of transactions increased considerably by 106.18 percent to 96.10 million during 2006 compared to 46.61 million in the preceding year.

The average daily value of shares traded amounted to SR19.86 billion in 2006 compared to SR13.84 billion in the preceding year, rising by 43.45 percent.

Moreover, the average daily number of shares traded went up by 25.89 percent to 258.55 million from 205.37 million in the preceding year. The daily average number of transactions rose by 132.63 percent to 362.63 thousands.

The value of shares sold and purchased through the Internet in 2006 amounted to SR5.44 trillion, the report further said.

A study of the share market by the three most active joint-stock companies in 2006 shows that Anaam International Holding Group Co. (ANAAM) ranked first in terms of the number of executed transactions (4.3 million), followed by Yanbu National Petrochemicals Co. (YANSAB) with 3.1 million, then the Saudi Electricity Company with 2.9 million.

With respect to the number of shares traded, the Saudi Electricity Company ranked first with 5.2 billion, followed by ANAAM with 4.1 billion and then Arriyadh Construction Co. with 1.8 billion.

As regards the value of shares traded, SABIC ranked first with SR230.0 billion, followed by the Saudi Electricity Company with SR204.7 billion and ANAAM Holding Company with SR172.3 billion.

During 2006, 10 new companies with a total capital of SR14.27 billion and 1,411.4 million shares offered 465.4 million shares for public subscription with a total value of SR10.45 billion. The total value of shares subscribed for stood at SR30.42 billion, as the rate of over-subscription was 2.9 times at the market level, and the average rate of oversubscription was 4.2 times.

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