OPERATING ENVIRONMENT

The global economic environment continues to reflect an uneven recovery across regions. While Asia, Latin America and Africa are growing at a faster rate, the recovery in the USA remains uncertain and the Eurozone faces slow growth and serious fiscal deficit challenges.

Against this backdrop, the South African economy reflected a stable performance after emerging from the recession during the third quarter of 2009, achieving (annualised seasonally adjusted) GDP growth of 2,6% and 4,4% respectively during the third and fourth quarters of 2010. As was the case for the rest of the world, growth was supported by further policy stimulus and growth in mining, manufacturing and retail trade volumes and improved external trade. Further easing in the inflation rate to 3,5% at 31 December 2010 allowed the South African Reserve Bank to cut interest rates by a further 100 bps during the period under review, to 36 year lows. Real disposable income reflected strong growth during the latter part of 2010 and job losses showed a modest reversal with 17 000 non-agricultural jobs created during the third quarter of 2010.

While the lower average interest rates weighed on FirstRand’s endowment income, the cumulative benefit of the interest rate cuts, a modest recovery in house prices, higher equity prices and real growth in disposable income eased pressure on consumers. This impacted positively on retail bad debt levels although there was an increase in commercial and corporate impairment levels in certain areas of the economy. Across the South African banking sector, balance sheets experienced low growth, due to the limited recovery in economic activity and the ongoing process of consumers deleveraging their balance sheets.

The markets in which our insurance interests operate remain complex, and were impacted upon, not only by the spill over of the international financial crisis, but also by considerable policy debates and increased legislation expanding consumer protection.