An extremely challenging business environment

In our trading update to shareholders at the beginning of December 2008 we highlighted that a challenging macro environment was playing out more negatively than expected. The operating environment has remained extremely difficult, characterised by further declines in asset prices, continued market volatility and a declining economic outlook, both locally and internationally.

Global economic growth deteriorated rapidly, with most of the world’s major economic powers entering recession. The international credit and liquidity crunch worsened significantly, culminating in governments rescuing and subsequently partially nationalising many of the largest international financial institutions.

Although the South African economy was to some extent sheltered from the international economic turmoil, it wasn’t immune to it, particularly with regard to a significant slowdown in exports and a decline in commodity prices. This, together with the high domestic inflation and interest rate environment, contributed to negative growth of –1,8% in GDP in the final quarter of 2008. Domestic interest rates remained high during the reporting period, with the first downward adjustment of 50 basis points occurring on 11 December 2008.

These factors negatively impacted asset growth, and combined with falling equity and house prices and lower customer affordability levels, resulted in further increases in bad debt levels, especially in our retail lending franchises.

The All Share Index declined 29% in the period under review, with commensurate downward pressure on performance and asset management fees derived from investment businesses.