Economic Context

At the outset of the year, we emerged from the worst of the COVID-19 crisis and experienced the last of a series of interest rate cuts to all-time lows. The dominating question then was if and when a recovery would come and what shape it would take. In the end, the year as a whole stood firmly in the shadow of the pandemic.


Our strategy responds to a dynamic operating context and guides trade-off decisions in resource allocation and priorities. It enables the Group to focus its execution, identify opportunities and effectively mitigate strategic risks.

Our operating context:

In the four quarters up to the time of writing, economic activity contracted sharply in real terms – in Namibia by 8.9%, in Botswana by 7.9% and in South Africa by 7.8%, as measured by GDP numbers. These represent some of the worst economic conditions in living memory.

Mining contracted by 26% and 15% in Botswana and Namibia, respectively, wholesale and retail trade by 5% and 12%, manufacturing by 9% and 20%, and tourism dropped by a third in both countries. These all dragged down transport and travel services significantly. Construction was severely curtailed by 11% in Botswana and 12% in Namibia. The latter constitutes the 5th year of contraction, decimating the industry – now worth a third of what it used to be. Fortunately, the agricultural sectors managed growth of 2% and 6% in the two countries. Finance had diverging fortunes, growing by 4% in Botswana but contracting by 12% in Namibia. Government and related public services grew, underpinned by emergency spending plans, while the IT and communications industry proved to be a lone beneficiary of the crisis.

In this environment, credit demand from the private sector was weak. In Botswana, loans and advances growth by commercial banks will be barely above 5%. In Namibia, the rate is half of that, while in South Africa, it is contracting. The COVID-19 shock is having a lagged and severely negative effect on the ability and willingness to take up credit.

Thus far, a generally improving global picture had a muted impact on domestic economic conditions except for commodity prices and the currency. The former is up by a third over the past 12 months and the latter is stronger by a quarter, measured by the Standard & Poor’s (“S&P”) Goldman Sachs Commodity Index™ and the Namibia dollar per US dollar exchange rate, respectively.

The recovery in the oil price by 80% year-on-year coaxed an increase in global oil production from some of the deepest cutbacks in production ever seen. Nevertheless, production is still down 8% over the past 12 months. The near doubling of oil, natural gas and steam coal prices has led to a global inflation impulse, such that the producers’ price index in the G7 is currently running at nearly 9.0%. It also contributed to domestic transport inflation jumping to 15.3%.

Some base metal prices have also been exceptionally strong over the 12 months. For instance, iron ore (+114%), copper (+55%) and zinc (+46%) are indicators of a sharp rebound in demand, thus far led by the two largest economies, the US and China. For 2021, these two are expected to grow by 7% and 8% respectively.

In the agricultural realm, a similar scene unfolded. The global maize price more than doubled, after having moved sideways to down for five years, and the South African Futures Exchange maize price is up nearly a quarter. Global agricultural and livestock prices are up 50% in US dollar terms. Domestically, food inflation remains relatively muted at 7%, but meat prices have risen by 17%.

Overall, consumer inflation has increased over the 12 months from just above 2% to 4.1% in Namibia and 5.2% in South Africa, while it has shot up to 8.2% in Botswana. Elsewhere, an important development has been the surge in consumer inflation in the US to 5.4% from near-deflationary conditions a year ago.

Monetary policy shifts

This has led to a shift in emphasis by the Federal Reserve. The Monetary Policy Committee (“MPC”) relented from its emphatic view of unchanged interest rates up to 2023 and now foresees increases by then, albeit small

hikes. This would be in the wake of a strongly growing economy, unemployment ratcheting down towards 4% and inflation measures moderating but staying at or above the target of a 2% average.

The MPCs of the Bank of Namibia and the South African Reserve Bank are faced with an altogether different scenario. Prospects for economic growth are bleak, and unemployment is stubbornly high at more than a third of the workforce and rising. Moreover, the demand for credit from households and businesses is likely to remain muted and inflation rates are set to remain around the mid-point of the target range over the next few years, following a bounce in the coming months. Therefore, if interest rates are to rise at all over the next 12 to 24 months, it will be gradual and slow.

The MPC of the Bank of Botswana has significantly stronger prospective economic growth to contend with and issued a warning on inflation. The latter breached the upper band of its target range and is expected to fall below it only by the second quarter of 2022, but with risks skewed to the upside. Therefore, it is likely that interest rate normalisation will start earlier in Botswana than in Namibia or South Africa.

The effects of the pandemic wreaked havoc on fiscal policy, as spending imperatives outpaced shrinking revenues. Globally, deficit-to-GDP ratios of more than 10% and debt-to-GDP ratios of more than 100% have become the norm. In our region, debt ratios are not that high yet, but deficits have blown out. Add to that high interest bills and debt maturities, and one has large borrowing requirements amid precarious fiscal positions, which lead to deteriorating creditworthiness. South Africa lost its last remaining investment-grade rating, while Namibia’s sovereign rating was pushed deeper into non-investment grade. Botswana’s rating was pegged back a notch by S&P Global Ratings but remains investment grade.

The crosscurrents of monetary policy that anchor short-term rates low and fiscal policy that pushes up longer-term rates, make for a steep yield curve. This results, inevitably, in capital flowing to the bond market, which increases the exposure of lenders to government. Banks are no exception. In Namibia, a fifth of banks’ assets now consists of government-issued debt.

Stubbornly lingering COVID-19 risks in the region, with their devastating effect on private sector confidence, have led to national policy plans that largely aim at mobilising infrastructure investments (broadly defined to include networks) that are as green as possible, driven by global climate imperatives. Refer to the Harambee Prosperity Plan II of Namibia, the Economic Recovery and Transformation Plan of Botswana and, among others, the National Economic Development and Labour Council in South Africa. One senses that for green bankable projects in macro environments that engender trust in the risk-return equation, there will be no shortage of capital from domestic and global pools looking for such. The Capricorn Group has proven this.

Success in these plans and initiatives will kick-start the mending process for economies and fiscal trajectories. In the words of Governor Moses Pelaelo: “… the crisis provided a window of opportunity for accelerated structural reforms” (Bank of Botswana 2020 Annual Report). Once again, we are at a juncture where there is an urgent need for the meeting of plans and capital with grit and corruption-free implementation.

Floris Bergh

Chief economist
Capricorn Asset Management