At the outset of the financial year, expectations for the global economy were low. At the time, banking stresses in the USA and Europe were acute. Recessions were predicted to roll through key economies, including the United States, Canada, Mexico, the UK, Brazil, Korea, and Russia. It led to fears that financial disruption or a significant credit crunch would derail the global economy. This put the health of financial systems, including that of Namibia, Botswana, and South Africa, under scrutiny. Fortunately, these economies were relatively unscathed, while banks maintained more than adequate capitalisation ratios.
We reached the end of an aggressive global monetary tightening campaign, with the last interest rate hikes implemented. Over the financial year, policy-driven interest rates plateaued, albeit at record high levels last seen 15 years ago. Restrictive monetary policy threatened to choke off the nascent recoveries of many economies, including Namibia, Botswana and South Africa.
Central banks remain wary of inflation risks. However, recent trends pave the way for monetary policy easing. Although South African inflation remains persistent, it is expected to decrease, potentially allowing the South African Reserve Bank to lower rates. The Bank of Botswana has already taken this step, anticipating that inflation will remain within the 3% to 6% target range. The Bank of Namibia is also likely to ease over the course of the coming financial year.
Namibia's outlook has brightened considerably, a substantial shift from recent times, when bleak prospects were expected. Foreign direct investment into the country reached record levels during 2023. By the first quarter of 2024, the real economy grew at 4.7% year-on-year, following 11 quarters of notable growth. The economy appears set for several years of positive growth, provided that the November 2024 elections solidify socioeconomic stability and drought conditions improve.
Botswana's recent GDP numbers showed a contraction in economic activity. Diamond mining experienced a severe downturn, and the agricultural sector is facing extreme drought. The International Monetary Fund cut its forecast for real growth for Botswana to only 1%.
In South Africa, bleakness has been replaced by cautious optimism that political change after the May 2024 elections can arrest deteriorating socioeconomic conditions. However, for growth to reach more than the 1% to 2% range, consumer, business, and investor confidence must recover significantly.
The global economy still faces several headwinds. Forward-looking indicators are troubling, interest rates are at record levels, and confidence is buffeted by political uncertainty and geopolitical conflict. In the United States, leading indicators remain deeply in negative territory, at levels that were previously associated with sharp slowdowns and financial shocks.
Similarly, in Botswana, growth in the money supply tended to exceed credit growth lately. However, this underwent a remarkable reversal late in the reporting period. Growth in loans and advances accelerated to nearly 11% year-on-year before slowing down again somewhat.
Demand for credit from households and businesses remains subdued in Namibia, Botswana and South Africa. While Botswana is unlikely to react much to further cuts in already low interest rates, there is scope for credit growth in Namibia and South Africa when interest rates are lowered. The real prime rates for the three geographies are 6.9%, 3.3%, and 6.6% for Namibia, Botswana, and South Africa, respectively. These restrictive real interest rate levels leave little leeway for consumers and firms to take up credit, especially when considering higher costs elsewhere, such as fuel prices that are roughly 50% higher than two and a half years ago.
Floris Bergh
Chief Economist
Capricorn Asset Management
