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.
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.
While monetary policy-makers pulled out all the stops, it has
become clear that fiscal policy will have to step in to stabilise final
demand. The USA approved a stimulus bill of U$2 trillion. Add this
to the deficit of U$1 trillion, and the total deficit equals 15% of
GDP. In South Africa, a fiscal package of ZAR500 billion was
announced. Not all of it will have a direct cash flow impact, but
the country’s original total budget deficit was ZAR350 billion.
Similarly, in Namibia, a plan worth N$8.1 billion was announced,
the equivalent of 4.5% of GDP. In the face of falling revenue due
to widespread economic weakness, the shortage was already
expanding above budget, and the latest estimate amounts to
12.5% of GDP. The resultant debt-to-GDP ratio is fast approaching
70%. This means that fiscal metrics have worsened substantially.
Creditworthiness would have, understandably, suffered further in the
region. South Africa lost its last remaining investment grade rating,
Namibia’s sovereign rating was pushed deeper into non-investment
grade and Zambia is being regarded as in, or on the verge of, default.
Reflecting this view is the 2022 maturity Eurobond that trades at a
yield of 52%. Botswana’s rating was pegged back a notch by
Standard & Poor’s (“S&P”) but remains at investment grade.
The earlier positive growth outlook for 2020 has been replaced by
expectations of deep economic contractions of (6.9%) in Namibia,
(5.4%) in Botswana and (3.5%) in Zambia.
Floris Bergh
Chief economist
