Page 43 - Capricorn IAR 2020

STRATEGY AND MATERIAL MATTERS
Our strategy aims to build sustainable competitive advantage in the countries we choose to compete in. We evaluate the sustainability of our strategic purpose by our ability to win: measured among others through market leadership, which can be growth in a specific segment, or by growing market share at a faster rate than competitors.
The financial year as a whole will be typified by what happened in its latter quarter. An unprecedented hard stop of economic activity was imposed globally, regionally and domestically by the announcement of various types of states of emergency and lockdowns on the movement of people and goods and services in reaction to COVID-19.
Travel and tourism stopped. Mines and factories came to a virtual stand-still. Construction activities were halted, the demand for electricity dropped sharply and transport services were severely curtailed. Wholesale and retail activity were temporarily boosted by panic buying before it was hit by the absence of feet in malls. The demand for credit slowed precipitously, leading to contractions in financial services.
Equity, capital, commodity, foreign exchange and money markets all reacted violently. The market sell-off’s and economic carnage are as bad, if not worse, than serious previous meltdowns, even the Great Depression of the 1930s. For instance, unemployment in the USA rose to an unprecedented 14.7%.
The Namibian dollar (-21%), the Botswana pula (-10%) and the Zambian kwacha (-29%) have all dropped sharply compared to the US dollar. Commodity prices fell hard. The oil price, having fallen below US$10 at one stage, is still 42% below where it started the year. The copper price recovered most of its losses but was down 25% at one point.
The policy response was unprecedented in its scope and speed.
Led by the Federal Reserve, central banks cut interest rates sharply. The Federal Reserve cut its rate to virtually zero from 1.75%, having maintained a rate of 2.5% as late as the middle of last year. It also announced a virtually unlimited quantitative easing programme that entails large-scale purchases of fixed income securities in the secondary market. This means that defaults by investment grade entities are unlikely.
Namibia and South Africa also cut lending rates aggressively.
Two cuts of 100 bps each were done outside of regularly scheduled meetings, after having lowered rates twice by 25 bps in the foregoing months. By June 2020 the Bank of Namibia has lowered rates by a cumulative 300 bps since the start of the cutting cycle. It is likely that this trend will continue, albeit at a slower pace. This will, in time, assist the economy but squeezes banks’ margins substantially.
The Bank of Botswana continued its rate cutting cycle. The bank rate has now halved over the past seven years from 9.5% to 4.25% as inflation fell away from 9.0% to below 2.0% of late. Inflation in Namibia also remained very subdued. It decreased from 3.9% at the start of the financial year to 2.1% in June. This is in line with the global phenomenon of ever lower inflation pressures emanating from general economic weakness and changing production and consumption patterns.
Our operating context: a year of
falling fortunes
At the outset of the financial year the macroeconomic landscape was challenging. However, even in the midst of recessionary conditions, there remained a sense that we were in a bottoming-out phase. Since then, of course, the bottom, literally, fell out.
At the time, credit growth in Namibia was above 8%, and expectations were that it would continue to grow at similar rates. In Botswana it grew at 7.1% and in Zambia at 31%. Non-performing loans in Zambia were on a firmly improving trend. At the time, we expected GDP growth in 2020 of 1%, 4.1% and 3% for Namibia, Botswana and Zambia, respectively.
Commodity prices were generally firm and rose somewhat until early 2020. For instance, the copper price rose from about N$5,900 per ton to N$6,270 over the second half of 2019. Over the same period the oil prices firmed from N$62 to N$70. Trends in commodity markets such as copper, oil and diamonds remain keys to the fortunes of the region.
Currencies were relatively stable. Over the second half of 2019 the Botswana pula and Namibian dollar were virtually flat, while the Zambian kwacha depreciated by only 10% versus the US dollar.
It appeared as if the rate of depletion of foreign exchange reserves in Zambia was slowing.
That is not to say that all was well on the fiscal front. Recession and drought played their part in straining government finances. Overspending and weak revenue growth resulted in climbing deficits. However, the order of magnitude was still manageable. That is, with the expectation that economies were on the mend.
The global economy experienced a mini upcycle as consumer confidence held up reasonably well and leading indicators were heralding better times ahead. The Federal Reserve of the USA was confident enough in the economy that it largely held interest rates steady. Unemployment in the USA was at an all-time low and inflation fears were absent.
In summary, macro-conditions were in an uneasy and fragile equilibrium until COVID-19.
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