our operating context informs the group’s strategic landscape

Key messages from this chapter

  • Namibia is in a recession, Botswana is improving its business climate, and Zambia is losing momentum.
  • Our four strategic choices guide us towards long-term thinking in this context and keep us focused on operational excellence to win.
  • Our eight material matters ensure that we keep those aspects that enable us to create sustainable value, top of mind.


Salient features

Potential impact for Capricorn Group

The Namibian economy is under severe pressure, and growth prospects remain sluggish. This translates into low levels of investment, low employment, reduced household consumption and an increase in non-performing loans in the Namibian banking sector.

Economic conditions significantly impacted customer affordability and resulted in a material increase in non-performing loans at Bank Windhoek.

Reduced investment activity, a material price correction in the housing market and a significant decrease in demand for vehicle and asset finance, resulted in the demand for credit decreasing to the lowest levels ever experienced in Namibia. The bank is also being more cautious in extending additional and new credit.

The subdued business activity impacts new customer acquisition and growth, resulting an increased pressure on non-interest income.

Policy uncertainty is affecting investor confidence, resulting in lower capital investment.

Banks typically experience lower levels of investment and lower demand for credit, which leads to lower levels of business activity impacting income. This may result in a potential increase in cost of funding.

The upcoming general elections might increase uncertainty
and encourage activism around issues such as land redistribution and the demand for affordable housing.

This will further affect business and consumer confidence and increase the need for corporate social responsibility (CSR) and stakeholder engagement.

The Namibian economy is still in recession. This is evident from indicators such as negative GDP growth (-2% in the first quarter of 2019), severe shrinkage in the sales of vehicles, slow credit growth and a hard-hit construction sector in conjunction with a sharp slowdown in the property market.

There are a number of factors that have been casting long shadows over the economy for the last three or more years:

  • Commodity prices such as oil and base metals dropped precipitously about three to four years ago with no meaningful recovery since. This has cut spending power in the region sharply.
  • Global and regional trade slowed. This has negative implications for the Southern African Customs Union revenue.
  • Global economic growth remained lacklustre against an uncertain political backdrop. Brexit is dragging along messily and inconclusively, and the “trade and tech war” is heating up.
  • The Chinese domestic economy is cooling, which dampens import demand from the rest of the world. For instance, car sales in that market are down 14%.
  • The extreme drought in the country is taking a heavy toll on the agricultural sector.
  • The general economic slowdown puts the revenue of the Namibian government under severe pressure. This forced fiscal consolidation that dampened spending, which rippled through the economy.
  • Consumer, business and investor confidence is further eroded in a climate of political and policy uncertainty.

Initially, it seemed that we would be over the worst in 2019/20 and that an upswing would be underway. However, it now appears that economic growth will be barely positive, if at all. Most of the factors mentioned above are not showing signs of dissipating.

Globally, regionally and domestically, we are entering a phase, once again, where growth expectations are being lowered. Analysts, commentators and policymakers are cutting their growth forecasts. For instance, the Bank of Namibia, the International Monetary Fund, the Organisation for Economic Co-operation and Development (OECD) and the South African Reserve Bank are expecting lower rather than higher economic growth going forward.

In this environment, it is not surprising that fears of disinflation or even deflation are more prevalent than fears of inflation. In Namibia, we expect inflation to average 4.5% to 5.5% for the foreseeable future, as is the case in South Africa. Food, oil and the exchange rate remain volatile drivers of inflation.

The Bank of Namibia introduced new regulations to limit the amount an individual can borrow. These include the debt-service-to-income ratio as an addition to the loan-to-value ratio, as well as adjustments to the Credit Agreements Act, 75 of 1980.

Although NPLs remained below the 4% target of the Bank of Namibia at year-end, further increases will be a threat to banks’ performance. The Bank of Namibia implemented credit bureau regulations to give commercial banks access to viewing consumers’ exposure and assist in affordability assessments before providing credit.

Growth in vehicle and asset finance accounts continues to decline due to government expenditure cuts on capital goods. Tighter credit criteria and changes in regulatory policy, which requires a 10% deposit on a vehicle loan, contributed to lower growth.


Salient features

Potential impact for Capricorn Group

Botswana’s GDP growth remains volatile due to large swings in the performance of the mining sector. The country remains dependent on a single commodity: diamonds. This makes the economy vulnerable to any downturn in diamond prices.

Bank Gaborone’s exposure to diamond mining is limited. However, doing business in the mining sector is seen as an opportunity as the outlook for diamond, coal, gold and copper mining is positive over the medium term. Awarding of new licences and investments by Australian companies add to the attractiveness of the sector.
Botswana was recently designated by the Financial Action Task Force (FATF) as a country of high risk for money laundering and terrorism financing. This comes despite government efforts to combat money laundering and its commitment to streamline policies and regulations to improve the business climate for private sector development and to attract foreign investment.

The lack of controls on terrorism financing and money laundering poses reputational risk and could affect investor confidence in the banking sector. It also puts Bank Gaborone’s correspondent bank relationships at risk.

The Bank of Botswana reduced the benchmark policy rate to 5% in March 2019 in response to weak economic activity and low inflation.

This is an attempt to promote investment growth and stimulate credit growth. It is, unfortunately, having the opposite effect as liquid assets are invested outside Botswana as investors seek higher money and capital market yields. This results in upward pressure on cost of funds, which, combined with lower lending rates, reduced the interest margins of banks.
The use of mobile and non-traditional banking services is increasing. Botswana has high levels of cellphone banking penetration. Botswana banks also have a model of so-called learner branches, with increased self-service access points inside and outside the branch for its clients. Cellphone banking is driving transactional income growth for banks.
The outcome of the general elections at the end of 2019 might have an impact on political stability. Instability might negatively affect the performance of the banking sector in Botswana.

The Botswana economy showed marginal improvement over the reporting period, with GDP growth at 4.5%, significantly higher than the previous year at 2.9%. Although the country continued to face low levels of economic growth, there are good prospects of recovery for the next reporting period based on the strong performance of the mining sector, as well as increased government capital expenditure. All sectors, apart from trade and water and electricity, recorded increased rates of growth when compared to the previous year. The mining sector experienced the most significant increase, registering a growth rate of 7.4% in 2018 compared to -11.1% in 2017. The steady increases in annual bank credit over 2018/2019 are also an indication of the improved business environment.

The bank rate remained at 5% and is expected to be maintained as such for the rest of the 2019 calendar year. Inflation as at June 2019 was recorded as 2.8%; below the lower boundary of the Bank of Botswana’s target range of 3–6%.

The European Union blacklisted Botswana alongside 22 other countries for money laundering-related deficiencies in February 2019, over and above the preceding grey listing of Botswana by the Financial Action Task Force (FAFT) in October 2018. This has led to an increase in legislation aimed at improving mechanisms to manage anti-money laundering and financing of terrorism efforts in the country.


Salient features

Potential impact for Capricorn Group

Large fiscal deficits and rising debt service costs have resulted in domestic expenditure arrears, taking a toll on growth.

Banks may start experiencing an increase in non-performing loans (NPLs) and tightening liquidity conditions. Zambia has seen an improvement in the NPL ratio the last 12 months in the sector. Interest rates have been relatively stable until May 2019 when the Bank of Zambia policy rate was revised upwards by 50bps. If the book deteriorates, IFRS 9 provisions will increase, which will also erode the capital base of Cavmont Bank and ultimately the earnings of the group.

The sovereign rating downgrade will further put pressure on foreign direct investment flows and the cost of raising international third-party credit lines. This could increase the cost of available funding and reduce the subsequent profitability of banks. A further impact of this is increased IFRS 9 impairment provisions on government securities, which could be significant for Cavmont Bank and the group.

GDP growth is losing pace on the back of lower agricultural production, mining output and constrained electricity production.

Pressure on consumer spending will affect the rate of deposits and transaction volumes for banks.

Forex trading will be impacted by mining output as mines attract more than 80% of foreign inflows. The further impact on Cavmont Bank will be a lack of growth in targeted sectors such as retail and wholesale trading, which is a key sector for Cavmont Bank.

Zambia’s GDP is forecast at between 2% and 3%, which is below the global growth rate of 3.6%. With GDP growth expected to slow and inflation rising, Zambia’s Central Bank raised its key interest rate, the Bank Policy Rate, for the first time since November 2015 from 9.75% to 10.25%. The impact of the drought on agricultural production and the resultant increase in food prices, combined with a volatile currency, have put the country on the back foot in terms of growth.

In the financial sector, the overall performance and condition of banking institutions remain satisfactory, premised on satisfactory capital adequacy positions, earnings performance and liquidity positions. However, asset quality is a concern due to the high level of NPLs.

The electricity deficit is expected to negatively impact productivity and ultimately put a strain on industries, with reduced output.

The recent implementation of structural and legal reforms should help to retain a level of stability. Macroeconomic policies continue to emphasise fiscal consolidation, prudence and the curtailment of avoidable expenditure.

The appointment of a new finance minister is expected to improve market sentiment as he brings his wealth of experience in monitory policy to the fiscal side. In the medium to long term, we expect a reversal of the recent downward trend in economic fundamentals and sentiments. As we head towards elections in the next two years, we expect the government to put huge projects in motion to stimulate economic growth.