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Wed 1 Aug 2012 05:03 PM

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Kuwait's Zain says no Q3 impairment on Sudan

Telco's key Sudan unit under pressure after Sudanese pound is devalued by 40%

Kuwait's Zain says no Q3 impairment on Sudan
GCC telecoms

Zain will not book an impairment in the third quarter for its key Sudan unit after the Sudanese pound was devalued by 40 percent in a move that cuts the dollar value of the subsidiary's earnings, the Kuwaiti telecoms operator told Reuters.

Khartoum devalued the pound against the dollar in early July, setting the exchange rate at between 4.30 and 4.70, from 2.70 previously.

The pound's street value has dropped since South Sudan seceded a year ago, depriving Sudan of three quarters of its oil output as well as its main source of state revenue and foreign currency.

"Q3 2012 will show the full impact of the currency devaluation," Zain said in an emailed response to questions. "However, we believe that we will not experience any impairment of the investment."

Zain Sudan accounted for a third of the group's 40.3 million customers at March 31. It made a first-quarter net profit of $51.3m, about a fifth of the group total.

At group level, Zain lists earnings in dollars and the Kuwaiti dinar, which is pegged to a basket of currencies in which the dollar has a big weighting. That means Zain Sudan's operating profit in these currencies will be reduced by roughly 40 percent.

A dollar shortage means that Zain has not repatriated any earnings to Kuwait from Sudan since the first quarter of 2011.

"There are no specific regulations preventing operators from repatriating profits, but the lack of hard currency is making the process more difficult," said Nadine Ghobrial, an EFG Hermes telecoms analyst in Cairo. "Zain Sudan has retained its profits locally to make it a self-financing unit."

The Sudanese currency is still significantly overvalued - a dollar bought between 6 pounds and 6.10 pounds on the black market on July 19, close to a historic low of 6.20 reached in May - and further devaluation could be on the cards.

Zain and rival operator MTN Sudan - a unit of South Africa's MTN - are likely to avoid taking a writedown by revaluing their non-cash assets to offset foreign-exchange losses arising from the pound's devaluation, analysts said.

Sudan's rampant annual inflation - 37 percent in June and expected to rise - has bolstered the value of non-cash items that include property and land.

MTN declined to comment on any impairments on the pound's devaluation. Its 2011 annual report states that a 10 percent drop in the pound's value against the rand would have reduced MTN Sudan's pre-tax profit by 239.1 million rand ($28.94m) last year.

The devaluation will also hurt operators in other ways.

"It will increase operators' costs because equipment is bought from foreign suppliers and priced in hard currencies," said Matthew Reed, a senior analyst at Informa Telecoms and Media in Dubai.

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