WEBVTT

1
00:00:00.392 --> 00:00:05.675
You're listening to Strictly Business
Podcast with Lindsay Williams.

2
00:00:05.715 --> 00:00:10.658
South Africa's postponed budget speech
2025 has finally been delivered.

3
00:00:10.698 --> 00:00:14.660
With me is Adam Furlan, Portfolio Manager
at 91 in Cape Town.

4
00:00:14.920 --> 00:00:16.481
Adam, let's get short term first of all.

5
00:00:16.501 --> 00:00:18.242
What's the market response been?

6
00:00:18.302 --> 00:00:24.745
Because the two instruments that are the
most sensitive, I suppose, are the South

7
00:00:24.745 --> 00:00:26.745
African rand and also the bond market.

8
00:00:26.745 --> 00:00:27.206
Thanks, Lindsay.

9
00:00:27.967 --> 00:00:29.488
Yeah, market response to the budget.

10
00:00:29.608 --> 00:00:33.629
But it looks to be positive to me.

11
00:00:34.109 --> 00:00:38.571
What we're seeing is an outperformance of
the long end of the curve.

12
00:00:38.571 --> 00:00:41.472
So that's the fiscally sensitive part of
the curve.

13
00:00:41.812 --> 00:00:47.833
And that's telling me that the market is
happy that the budget that has been

14
00:00:47.833 --> 00:00:49.833
represented

15
00:00:49.833 --> 00:00:54.836
shows consolidation, no new additional
borrowing compared to what was presented

16
00:00:54.836 --> 00:00:56.836
two weeks ago,

17
00:00:56.836 --> 00:00:58.836
despite...

18
00:00:58.836 --> 00:00:59.417
having less revenue measures in the form
of VAT.

19
00:00:59.978 --> 00:01:03.219
From an FX perspective, the RAND has
remained quite stable.

20
00:01:03.559 --> 00:01:10.202
It's moving around more in line with
what's happening with the US dollar than

21
00:01:10.202 --> 00:01:12.202
to local factors.

22
00:01:12.202 --> 00:01:16.765
But there was some risk premium built in
in the lead up to the budget as we are

23
00:01:16.765 --> 00:01:18.765
still uncertain about whether or not

24
00:01:18.765 --> 00:01:20.765
this will be approved in Cabinet.

25
00:01:20.765 --> 00:01:23.628
And that risk premium remains in the
currency at the moment.

26
00:01:24.072 --> 00:01:25.292
That's the short-term response.

27
00:01:25.292 --> 00:01:26.873
What about the longer-term sentiment?

28
00:01:26.893 --> 00:01:33.855
I mean, you haven't had a chance yet to
probably get into the real nitty-gritty,

29
00:01:33.855 --> 00:01:35.855
and you'll be sitting down with your team
at 91 tomorrow, no doubt,

30
00:01:35.855 --> 00:01:36.016
and saying, well, look what they've done.

31
00:01:36.036 --> 00:01:38.676
Is the long-term sentiment a positive one?

32
00:01:40.237 --> 00:01:40.937
I think so.

33
00:01:41.937 --> 00:01:48.680
I think the positive signals we can take
from this are the elements of the budget

34
00:01:48.680 --> 00:01:50.680
that the GNU has completely agreed on.

35
00:01:50.680 --> 00:01:52.680
And we see...

36
00:01:52.680 --> 00:01:56.805
No change to the initial increase in
infrastructure spending that was tabled in

37
00:01:56.805 --> 00:01:58.805
the first budget.

38
00:01:58.805 --> 00:02:03.991
So that is a cumulative $47 billion
increase over the next three years for an

39
00:02:04.031 --> 00:02:05.292
allocation to infrastructure.

40
00:02:06.093 --> 00:02:08.955
That is something the GNU are aligned
behind.

41
00:02:09.495 --> 00:02:15.500
And probably the most important thing that
the GNU are aligned behind is the fact

42
00:02:15.500 --> 00:02:17.500
that they do not want to

43
00:02:17.500 --> 00:02:17.722
borrow additionally in the market.

44
00:02:17.842 --> 00:02:19.804
They don't want to increase levels of
debt.

45
00:02:20.256 --> 00:02:27.181
And they do want to start consolidating
our debt to GDP level and peaking in

46
00:02:27.181 --> 00:02:29.181
fiscal

47
00:02:29.181 --> 00:02:31.181
year 25, 26.

48
00:02:31.181 --> 00:02:34.386
And those are very positive signals, both
for growth and for debt sustainability

49
00:02:34.386 --> 00:02:36.386
from the fiscus.

50
00:02:36.386 --> 00:02:41.471
Do you think the rift has been healed
between the various parties in the GNU,

51
00:02:41.471 --> 00:02:43.471
given what happened a couple of weeks ago,

52
00:02:43.471 --> 00:02:45.471
Adam?

53
00:02:45.471 --> 00:02:46.114
Because it's terribly important to send
out a unified message.

54
00:02:46.154 --> 00:02:48.816
So do you think the message that has been
sent out is good?

55
00:02:48.916 --> 00:02:49.976
bad or indifferent?

56
00:02:50.817 --> 00:02:52.958
At the moment, it's still quite uncertain.

57
00:02:53.638 --> 00:02:58.240
So I'm going to say indifferent, that we
have come back and seen a compromise.

58
00:02:58.560 --> 00:03:01.101
And I think that in itself is positive.

59
00:03:01.481 --> 00:03:06.023
However, it is not clear that this
compromise is enough or has been agreed

60
00:03:06.023 --> 00:03:08.023
upon just yet.

61
00:03:08.023 --> 00:03:12.846
So I'm going to say it's an indifferent
signal until we do see some more clarity

62
00:03:12.846 --> 00:03:14.846
on

63
00:03:14.846 --> 00:03:16.368
whether all parties can agree to the newly
presented budget.

64
00:03:16.824 --> 00:03:21.667
The bigger picture of fiscal consolidation
and debt being addressed,

65
00:03:21.727 --> 00:03:24.629
was that also addressed to your
satisfaction?

66
00:03:27.291 --> 00:03:29.433
I would say almost.

67
00:03:29.493 --> 00:03:34.136
I mean, we would prefer, you know, a
faster debt stabilization profile.

68
00:03:34.516 --> 00:03:38.339
But, you know, it is a tough environment
for the Treasury.

69
00:03:38.979 --> 00:03:45.224
They do have spending pressures that they,
you know, are somewhat out of their

70
00:03:45.224 --> 00:03:45.303
control.

71
00:03:45.704 --> 00:03:49.207
And we think the budget that they have
prioritized, a bit of growth spending,

72
00:03:50.328 --> 00:03:55.592
increased a bit of taxes to fund that and
not let the deficit widen,

73
00:03:57.013 --> 00:03:58.154
is a very good outcome.

74
00:03:58.314 --> 00:04:04.460
Although we'd obviously like to see a
faster consolidation profile and a bit

75
00:04:04.460 --> 00:04:06.460
more allocated

76
00:04:06.460 --> 00:04:10.685
out of non-growth expenditure into
longer-term growth-positive expenditure.

77
00:04:10.965 --> 00:04:12.846
What about bigger macro issues, Adam?

78
00:04:12.866 --> 00:04:14.488
What about GDP growth?

79
00:04:15.028 --> 00:04:15.808
was it addressed?

80
00:04:16.088 --> 00:04:17.229
What about inflation?

81
00:04:17.409 --> 00:04:18.689
Was that also mentioned?

82
00:04:19.969 --> 00:04:25.831
GDP growth, you know, they have revised up
slightly their GDP growth assumptions.

83
00:04:26.431 --> 00:04:30.993
And very much, you know, GDP growth would
be on the back of, you know,

84
00:04:30.993 --> 00:04:36.914
the infrastructure and reform agenda that
is under Operation Bulindlela.

85
00:04:37.714 --> 00:04:42.876
So that is very dependent on, you know,
those reforms happening and working.

86
00:04:44.934 --> 00:04:45.796
as they expect.

87
00:04:46.396 --> 00:04:51.483
And we do see the possibility for

88
00:04:52.265 --> 00:04:58.653
South African GDP growth to realize close
to 2% over the medium-term experiential

89
00:04:58.653 --> 00:05:00.653
framework on an annual basis.

90
00:05:00.653 --> 00:05:02.653
That would be quite positive.

91
00:05:02.653 --> 00:05:05.523
On the inflation front, we have been in a
very benign inflation environment.

92
00:05:06.524 --> 00:05:10.287
The VAT measures that we've seen put in
place in the new budget,

93
00:05:10.367 --> 00:05:13.589
so half a percent per year over the next
two years,

94
00:05:14.530 --> 00:05:20.854
are not expected to have a significant
impact on the inflation rate going

95
00:05:20.854 --> 00:05:20.893
forward.

96
00:05:21.674 --> 00:05:27.979
The Treasury expects the VAT increase to
add 0.15% to inflation,

97
00:05:28.479 --> 00:05:29.179
which is...

98
00:05:29.800 --> 00:05:34.364
which is not a meaningful impact in the
current inflation environment.

99
00:05:34.765 --> 00:05:40.630
Talking about significant impact, has
this, in your mind at the moment anyway,

100
00:05:40.630 --> 00:05:42.630
having just digested the budget,

101
00:05:42.630 --> 00:05:48.156
has this made a significant impact
potentially for the positioning of the 91

102
00:05:48.156 --> 00:05:50.156
Diversified Income Fund?

103
00:05:50.156 --> 00:05:52.640
Again, I said earlier on, it's probably a
little bit too early, but what does your

104
00:05:52.640 --> 00:05:54.640
gut feel at the moment?

105
00:05:54.640 --> 00:05:56.584
And if it's not going to change your
position, what is your position at the

106
00:05:56.584 --> 00:05:56.843
moment?

107
00:05:57.416 --> 00:06:00.298
So in the diversified income portfolio,

108
00:06:00.838 --> 00:06:07.342
we have been overweight the longer end of
the curve in the South African bond

109
00:06:07.342 --> 00:06:07.522
market.

110
00:06:07.522 --> 00:06:11.584
So the 20-year area of the curve sensitive
to fiscal dynamics.

111
00:06:12.485 --> 00:06:16.787
That is because we see too much fiscal
risk price into the curve.

112
00:06:17.188 --> 00:06:23.771
We do not think that this, you know, this
disagreement within the GNU is completely

113
00:06:23.771 --> 00:06:25.771
negative.

114
00:06:25.771 --> 00:06:27.771
It is actually...

115
00:06:27.771 --> 00:06:31.414
showing the ability of this government to
function together and compromise on a

116
00:06:31.414 --> 00:06:33.414
budget that all parties can agree on.

117
00:06:33.414 --> 00:06:38.756
So whilst it is difficult and a bit
volatile and uncertain in the short run,

118
00:06:38.756 --> 00:06:40.756
we think longer run this may lead to
better outcomes.

119
00:06:40.756 --> 00:06:45.698
So we have increased our duration exposure
to that long end of the curve in response

120
00:06:45.818 --> 00:06:52.720
to what we think is quite a reasonable
outcome and quite a mature outcome from

121
00:06:52.740 --> 00:06:53.440
the beginning.

122
00:06:53.760 --> 00:06:56.522
the first budget under the government of
national unity.

123
00:06:57.263 --> 00:06:58.884
I sense cautious optimism, Adam.

124
00:06:58.944 --> 00:07:00.345
Thank you very much for your analysis.

125
00:07:00.665 --> 00:07:04.007
Adam Furlan is a portfolio manager at 91
in Cape Town.

126
00:07:04.748 --> 00:07:11.693
The views and opinions expressed in these
podcasts are those of Lindsay Williams and

127
00:07:11.693 --> 00:07:13.693
various contributors and do not reflect
the policy,

128
00:07:13.693 --> 00:07:15.435
position or opinion of any other agency,
organisation,

129
00:07:15.775 --> 00:07:20.418
employer or company associated with
StrictlyBusinessPodcast.com.

130
00:07:20.879 --> 00:07:27.823
Assumptions made on the analyses are not
reflective of the position of any other

131
00:07:27.823 --> 00:07:29.823
entity other than the speaker or the
author.

132
00:07:29.823 --> 00:07:33.306
And since we are critically thinking human
beings, these views are always subject to

133
00:07:33.306 --> 00:07:33.405
change,

134
00:07:33.586 --> 00:07:36.147
revision and rethinking at any time.

135
00:07:36.447 --> 00:07:38.869
Please do not hold us to them in
perpetuity.