The impact of economic reforms and new regulations introduced by the Communications and Information Technology Commission (CITC) in Saudi Arabia could negatively impact the kingdom's telecom sector, says a report by NCB Capital, the investment arm of Saudi lender NCB. The net income of Saudi Arabia's telecom sector is expected to decline 1.4 percent in 2018 to SAR 9.3 billion driven by lower revenues.
Mobile users will continue to decline in 2018, the report says, due to the implementation of economic reforms, which will influence a decline of 2.9 percent to 39 million mobile users, resulting in a penetration rate of 123 percent, compared to a 16.1 percent year-on-year decline in 2017 with a penetration rate of 127 percent.
NCB Capital predicts a decline in the top-line and net income by 1.5 percent and 1.4 percent, respectively, in 2018. However, the sector EBITDA margin is expected to expand to 37 percent from 36.4 percent driven by better cost control and the impact of lower mobile termination rate (MTR) charges for telecom providers Mobily (Etihad Etisalat) and Zain Saudi Arabia, a subsidiary of Kuwait's Zain Group.
The CITC introduced several regulations in 2017 which are expected to continue to impact the kingdom's telecom sector in 2018. These include lower MTR, the removal of a voice over IP (VoIP) ban, and fair usage policy cancelation. The CITC reduced MTRs by 45 percent, starting from January 2018 with Zain Saudi Arabia being the main beneficiary from this reduction due to its low market share, and hence higher MTR costs, according to the report.
"We expect the removal of the VoIP ban to reduce revenue from international calls, which account for 7 percent of sector revenue," the report says. "However, the fair usage policy cancelation will increase data usage and offset the negative impact as higher price data bundles are introduced."
The Kingdom of Saudi Arabia is implementing rapid transformations to compensate for the oil price slump since 2014 and to create new revenue streams other than oil income. The kingdom introduced an excise tax in 2017 and 5 percent VAT this year to help generate more income. Saudi Vision 2030 is a plan to reduce Saudi Arabia's dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation and tourism.