Green shoots yet?

I recently attended a Morgan Stanley conference, where I had the opportunity to hear from some key figures in government including the SARS Commissioner, the CEO of Transnet, the Deputy Director General of the NHI, the Deputy Director of the NPA and the Deputy Minister of Finance. It was a comprehensive line-up, made more interesting by the fact that some of these officials were recently appointed after the GNU was formed.

My immediate observations were:

• The government representatives articulated well-conceived plans, with clear actions and steps to achieve their stated goals.
• A recurring theme was the importance of “working with the private sector”—which I agree is necessary given the scale of the impact required.
• A big focus on the digitisation of government departments to drive efficiency. Currently, the Department of Home Affairs is emerging as the front runner in this regard (claims are that planned reforms could add close to a full percentage point to GDP growth).
• They were candid about the challenges they respectively face, primarily red tape within the bureaucratic government structure and budget constraints.

It was almost amusing to watch each official come up and request more funding, only for the Deputy Minister of Finance to stand up at the end and sternly remind everyone that there will be no handouts or bailouts—and that National Treasury are committed to staying within the fiscal envelope.

This is exactly what concerns me. With a debt-to-GDP ratio nearing 75% and almost 20% of government revenues going toward servicing this massive debt, how can the State efficiently allocate funds for much-needed social and economic reforms?

The answer lies in growth but we seem to be caught in a downward spiral. For growth, we need fully functioning, debt-free SOEs, lower unemployment, a stronger middle class and thriving businesses—small and large—to create jobs. This would lead to infrastructure development and spending, increased consumer spending, savings and capital accumulation. Unfortunately, after years of waste and mismanagement during state capture, we have very little left to work with.

The good news is there is light at the end of the tunnel of our energy woes. However, Transnet remains the single largest detractor from growth, representing a drag of anywhere between 1-2% to GDP growth. Water is another looming issue that requires attention. There seems to be a sense that it is “a problem for another day”, however, as we have learnt from other service delivery crises, this needs to be addressed right now.

Overall, I left the conference feeling a mix of cautious optimism and justified concern. My sense is a real confidence boost will come when we see good progress on executing structural reforms – particularly Operation Vulindlela delivering positive results, a turnaround in key SOEs with strong governance in place and increased infrastructure investment driving business confidence and capital flows. Only then do we believe that the country has set the foundation to reverse the downward spiral and move towards sustainable growth.

In this edition

With this backdrop in mind, I am pleased to share Perpetua’s latest Fixed Income Quarterly Commentary with you. In this quarter’s edition we reflect on key market developments in recent months and provide an updated assessment of our macroeconomic and geopolitical outlook. We see these factors as well as other fundamental drivers continuing to weigh on domestic and global fixed income markets over coming months. Ultimately this connects closely to our fixed income positioning.

Key points of discussion this quarter include:

• The ongoing possibility of a recession in the U.S. and the trajectory of the Fed rate cutting cycle.
• The impact of Trump vs Harris victory on American fiscal policy and economic outcomes.
• The path of likely monetary policy action by the SARB.
• Our reflections on the early days of South Africa’s Government of National Unity and the impact on the domestic economic outlook.
• Our insights on the growing green bond market in South Africa and the investment opportunities it presents.

Enjoy the read!