Commercial Bank of Namibia 1999 Annual Report



Q	How will the proposed merger between Nedbank and Standard Bank in South Africa affect Commercial Bank of Namibia?

A	It is premature to comment at this stage, given that legal proceedings are under way and that a formal offer has yet to be tabled. However, consolidation in the South African banking sector has been widely expected for some time. We believe this will benefit the participants as competition increases in what is a relatively mature market. We also believe the implications for Namibian banks are positive, offering better economies of scale and capitalising on technological advantages.

Q	In the acknowledged information age, how will Commercial Bank of Namibia harness technology?

A	Sophisticated technology platforms, such as Globus, will optimise our ability to attract and retain customers in our selected markets, and to make our own people even more productive. Ultimately, banking in the 21st century will be founded on service, and technology gives us the means to provide that service, and to develop the products our clients need.

Q	In financial services sectors worldwide, distribution channels are increasingly important. How will the bank develop its own channels?

A	Although the Internet is changing the way companies do business, the basic premise of business has not changed. Succeeding in tomorrow's business environment is not just about e-business, it is also about integrating the web into your existing business model. Intel's chairman Andy Grove uses a business model he calls "bricks and clicks". The real future to which both the bricks companies and the clicks (Internet) companies will convert is "clicks and mortar" companies. To make that transition, companies must implement three key phases: build an infrastructure, adapt existing business practices and then use those new capabilities to adapt to things you have not thought of before. The bank is completing phase one infrastructure. The real challenge is in phase two adapting business practices. The success of our electronic banking service, with corporations and individuals alike, reflects our progress towards making optimal use of direct, indirect and electronic distribution.

Q	Turning to the economic environment, how would you describe international conditions in 1999?

A	Last year was one of recovery and restoration in the global financial system. In 1998, the full force of the emerging market crisis and contagion hit currencies, interest rates, stock markets and commodity prices. The effect in many developing countries was devastating, sending many countries in Asia, South America and Africa into recession. Happily, fortunes changed in 1999, with many of these trends being reversed. Behind this recovery was the quick policy response from the US and other developed countries, which cut interest rates and provided liquidity to nervous financial markets. Multilateral institutions such as the IMF mounted massive rescue operations and displayed more flexibility than in past crises, allowing fiscal expansion to occur while necessary restructuring, particularly in banking systems, took place. The speed and extent of the recovery in Asia surprised many. For example, in South Korea, the economy grew by an estimated 9,0% after a severe 5,8% contraction in 1998. Its current account moved from a deficit of 4,4% of GDP in 1997 and 1,7% in 1998 to a surplus of 12,9% in 1999. This reflation, combined with low commodity prices and impressive productivity gains, spurred growth in the US, where the economy expanded by 4%, with average growth of just under 6% taking place in the final two quarters of 1999. Elsewhere, there were some encouraging signs. European (E-11) growth slowed to an estimated 2,1% from 2,9% in the previous year, but growth picked up during the second half of the year. The introduction of the euro went relatively smoothly, although the currency's depreciation against other major exchange rates was the topic of considerable discussion. Japan's economic performance remains disappointing, however, given that the upswing in the rest of Asia improved demand for capital goods. This and continuing public works programmes helped the economy grow by a modest 1,5%.

Q	And in southern Africa?

A	In southern Africa, we were fortunate in that banks proved to be very sound and able to withstand significant financial turmoil. However, the severe upturn in interest rates in 1998 and lower commodity prices kept conditions fairly weak until well into 1999, when some relief in the form of lower interest rates and better export performance helped the recovery. It is encouraging that capital flows to this region were quickly restored following the crisis, with South Africa able to rebuild its official foreign exchange reserves dramatically, from 2,3 months of import cover at the beginning of the year to 9,0 months at the end. This in a year that included the uncertainty of an election, a major change at the central bank and the Y2K issue. Growth in South Africa was still relatively modest, probably around 1,2%, but with steady improvement shown during the course of the year. Consumers and businesses were obviously reluctant to dip into credit, given the spike in interest rates and the dent to confidence caused by the sudden shock. However, the demutualisation of Old Mutual improved personal financial positions by reducing debt levels and gradually confidence started to improve.

Q	More specifically, what happened in Namibia?

A	The Namibian economy expanded by an estimated 3% in 1999. There was some recovery in the primary sector of the economy, but conditions were far from uniform. Within mining, diamond output and prices benefited from a stronger world economy and rising offshore production. Agricultural performance was mixed, with some recovery in field crops (although still disappointing), but herd restocking reduced meat available for processing. Difficult conditions in the pelagic fishing industry continued, although this was more than compensated for by improved quotas in the increasingly important hake catch.

Q	What about prospects in 2000?

A	The international environment appears favourable, with hopes that economic growth will both improve as well as become more synchronised. The US economy remains very robust but is likely to slow to a more sustainable pace as the year progresses. However, increased economic activity in Europe, as well as Latin America and Asia, should lead to stronger overall world growth, better commodity prices and improved trade. The world economy is expected to expand by over 3,5% in 2000 following just over 3,0% in 1999. Under these circumstances, the recent rallies in commodity prices should be sustained and even gain momentum. Of particular importance to the subcontinent are diamonds and precious metals, which gain from a recovery in Japan in particular. The expected international environment will also mean continued capital flows to the region, which are important for sustainable growth, given the lack of local savings. In South Africa, most forecasters are looking for growth in excess of 3% as lower interest rates and improved confidence help consumer spending. This and rising exports will result in rising fixed investment spending as the year progresses. Interest rates have some further downside potential as they are still high in real terms, but should start to level out in 2000 as spending improves. Despite contained inflation, with core inflation even easing further, the South African Reserve Bank will probably take a cautious monetary policy stance, particularly with the introduction of inflation targeting. Namibian growth prospects have also improved. Diamond production will benefit from expanding offshore operations and the world market is expected to be favourable. Early indications are that agricultural output will be better, given good rains, and fishing could be helped by an increase in the hake quota, although most other species are still likely to be protected to help the recovery of stocks.

Q	What could upset this outlook?

A	At a global level, the threat of systemic crisis spreading through emerging market countries seems to have diminished. The key imponderable is what will happen in the US, where asset prices have soared along with confidence. However, falling personal savings and a rising current account deficit increase the chances of an accident, which would have repercussions everywhere.

Q	What challenges lie ahead for Namibia in particular?

A	The key remains diversification. The economy remains too dependent on external factors such as the weather, oceanic conditions or commodity prices, which are difficult to predict and often erratic. The lack of progress in the EPZ initiative has been disappointing, as manufacturing is one way to reduce this dependence. The other is by expanding service industries such as tourism, which employ many and have multiplier effects throughout the economy. Again, it was disappointing to see the setback that this key area received following the unrest and rogue attack on foreign tourists in the north. Clearly, political stability and better security will have important consequences for growth in the region.

Q	What is the outlook for the bank in 2000?

A	The year ahead is expected to be another challenging one for the domestic economy, given that short-term prospects are largely dependent on climatic conditions, international trends in the mining sector and interest rate patterns. The significant reductions in interest rates during 1999 should, hopefully, pave the way for a recovery in economic activity in 2000. Commercial Bank of Namibia is recognised as a leading and competitive client-focused provider of banking services. Its success in the market is reflected in the consistent improvement in profitability noted in the managing directorate's report. I am confident that the bank will deliver further steady growth in 2000.