We connect material matters to risk and strategy processes

Capricorn Group’s ability to create value over the short, medium and long term relies on the Group’s response to those matters that can materially affect us – positively or negatively. We assess our operating context, business trends and stakeholder feedback to continuously evaluate these matters. We describe these external and internal factors in other sections of this report.

We first identified the Group’s material matters in 2016 and have since integrated the process of identifying, reviewing and evaluating our effective responses with our risk and strategy processes. The eight material matters are linked to our principal risks, and board governance oversight accountability is assigned to each. Material matters are discussed at the quarterly Group principal risk officer (“GPRO”) meetings and the business unit strategy sessions.

The board approved the material matters for 2020 as part of the AsOne2023 strategy in May 2020. The material matters remained largely the same as in 2019, with our top matter becoming even more pertinent in the past year.




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.

Our operating context: a year offalling 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.

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