Barren business landscape

Jo-Mare Duddy – The business environment in Namibia has “deteriorated substantially” over the past year, is “highly challenging and currently very fragile”.

The sector is likely to “feel the heat for another 12 to 18 months”.

These are the views of three analysts approached by Business7 for comment on the prevailing business landscape.

A quick glimpse at the latest financial year results of the heavyweights on the Local Index of the Namibian Stock Exchange (NSX) is all you need to realise just how precarious the situation is.

Profit bleed

Releasing its results for the 12 months ended June 2017, the Capricorn Group said the “Namibian economy experienced one of its biggest challenges since independence with the gross domestic product declining significantly from a 3.3% growth during the prior financial year, to a contraction of 1.8% during the first three quarters of the current financial year, based on the quarterly figures published.”

Capricorn posted a net profit of N$917.6 million, up only 1.39% on its 2016 financial year. Annual growth from 2014 to 2016 averaged 22.5%.

FNB Namibia Holdings, the company with the biggest total market capitalisation on the Local Index, got hit a lot harder. Its net profit of N$1.1 billion was 8.6% less than in 2016, in stark contrast to average annual growth of 26.1% from 2014 to 2016.

“During the year the Namibian economy continued to struggle as gross domestic product numbers confirmed that the economy remained in the grip of a recession for four consecutive quarters,” FNB Namibia Holdings summarised the 12 months ended June 2017.

Investors felt the pinch. Capricorn’s dividend for the past financial year only increased by 3% compared to 2016. From 2014 to 2016, the group rewarded investors with average annual dividend growth of 26.5%. FNB Namibia’s 2017 dividend was 7.4% less than that of 2016. From 2014 to 2016 the group boasted an average annual dividend growth of 40.7%.

Bidvest Namibia was hurt virtually across the board, suffering a drop of nearly 80% in the trading profit of its fish division, 46% in its vehicle segment, about 27% in its commercial and industrial division, and 1.8% in freight and logistics. Bidvest Namibia’s food and distribution made a trading loss of more than N$8 million.

The group’s net profit of N$61.8 million for the year ended June 2017 was nearly 74% less than the previous year, and its dividend tumbled by the same percentage.

Bidvest Namibia attributed its weak performance in all its divisions (except fish) to the recession.

Although Namibia Breweries delivered solid operational results for the year to 30 June 2017, its sales volumes locally shrunk by 3% compared to last year. Analysts attribute the drop to consumers trying to stay afloat.

Obstacles

Insufficient domestic demand and uncertainty of the economic environment top the list of manufacturers’ headaches in Simonis Storm’s survey of the sector in the second quarter of 2017.

More than 20% identified demand as the factor limiting their ability to increase production, while 20% cited uncertainty. In the first quarter, financial problems and insufficient foreign demand were the manufacturers’ biggest worries.

SS director and research chief Purvance Heuer says the challenges are “equally relevant to the entire business sector”.

According to Heuer, the business environment has deteriorated substantially over the last 12 months. “The combination of government consolidation and the construction sector contraction is having a negative effect on the wider economy as a whole,” he says.

Rowland Brown, co-founder of Cirrus Capital, says there are “current, more transitory challenges”, as well as “longer term issues” plaguing business.

In the first category he mentions “constrained liquidity in the country coupled with, and resulting in, a reduction in the circulation and the velocity of circulation of money”. This remains a major challenge, presenting real cash-flow issues for many corporates, Brown says.

Although “positive for the country in the long run, if detrimental in the short term”, the “rapid reduction in expenditure by central government adds to these cash-flow challenges”, he says.

“The general slowdown in the economy, coupled with the employment and revenue feedback loops as fewer people are employed and spending less money, further adds to the challenging environment, as household discretionary incomes are under pressure and consumer spending is lower than normal,” Brown says.

“The current business environment in Namibia is highly challenging and currently very fragile,” he says.

Eloise du Plessis, research head at PSG Namibia, adds that the disappearance of the Angolan retail tourist due to economic pressures in the neighbouring country, is suppressing demand in the retail sector too.

Credit

Indicative of business’ hardship is the fact that the corporate sector is not taking on additional debt at the moment, Du Plessis says.

Statistics released by the Bank of Namibia (BoN) show annual credit growth to the business sector has trickled down from 12.8% in July 2016 to 5% a year later. In July 2015 the figure was 22.8%.

In money terms corporate debt grew by about N$5.6 billion in the year to 30 July 2015. The next year the sector increased its debt to nearly N$3.9 billion. The latest data shows business debt in the year to July 2017 grew by only N$1.7 billion.

Of all the credit categories, overdrafts are rapidly growing. In the year under review they ballooned by more than N$1.28 billion or 17.6% to nearly N$7.3 billion. As such they constitute about 24% of the total corporate bank debt of nearly N$35.9 billion. Except for mortgage loans at N$11.1 billion, overdrafts are the biggest component of corporate credit.

Du Plessis says although corporate sector credit accounts for only 41% of total private sector credit extension (PSCE), it continues to drive overall credit extension growth lower.

Remedies

Asked about solutions to mitigate the current business slump, Heuer said: “I think it will be difficult to do without very painful structural reforms for which there is perhaps no political will. As an example, the public wage bill is way too large and we have a severe shortage of skills in Namibia.”

Brown says “liquidity has picked up dramatically in the past three months, and will likely remain elevated for the rest of the year and into 2018, which bodes well for an improvement in business conditions. Added to this, external factors seem to be slowly recovering and government finances, while still extremely fragile, do appear to be stabilising, albeit slowly”.

However, the major concerns around policy and policy proposals remain, he says. These must be resolved in order to stabilise the investment environment. “This requires that the reworking of the Promotion of Investment Act continues, and that an act that promotes the interests of investors is the end result.

“Further the uncertainty around NEEEF (New Equitable Economic Empowerment Framework) needs to be resolved, and a genuinely pro-empowerment bill, which is not detrimental to investors and continues to promote growth and the more equitable development of wealth in the country, is needed,” Brown says.

He says it is “critical that the final version of NEEEF is not simply a watered-down version of the previous document, but a revolutionised document that actually achieves empowerment without deterring investment from the country.”

Du Plessis adds that “creating policy certainty in general is one of the important steps to get Namibia back to broad economic growth”.

Outlook

Heuer believes business activity will continue to be “sluggish” going forward. “I foresee that the effects of the overall slowdown will only now start showing in the rest of the economy.” The effect of struggling SOEs (most recently SME Bank and Roads Contractor Company) has led to more unemployment and this will add to the sluggish performance, he says.

Du Plessis says businesses will probably “feel the heat for another 12 to 18 months”.

“The lower inflation numbers and decreasing interest rates will help the Namibian consumer breathe, but won’t translate into major increased consumption immediately.”

From 2019, the outlook is more positive, she says.

According to Brown, the outlook is slowly improving on many fronts and will likely continue to do so going forward.

“However, the remaining policy uncertainty will continue to dampen investment in the country, and as a result growth, until resolved. Progress appears to be being made in certain policy spheres, but confidence has been severely dampened by the recent economic downswing and the initially lack-lustre policy response.”

Should the policy conditions improve, the economy is likely to experience a gradual recovery towards the end of 2017 and 2018, Brown says.