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The Asset Class: Sisamkele Kobus & Adam Furlan · Strictly Business

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
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  The MTBPS has been delivered by the Finance Minister of South Africa.
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  That's the Medium Term Budget Policy Statement.
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  With me is CISUM Kele Korbus, Economics Analyst at 91, and also from 91, Portfolio
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  Manager
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  Adam Furlan.
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  CISUM, can I start with you?
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  I always like to ask what the mood was like, what sort of demeanour the Minister
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  had.
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  How was it in your eyes?
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  I think for most of the speech at the beginning, I was still in lockup,
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  so couldn't quite see the minister's demeanor.
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  But before I get to the minister's demeanor, I'll talk about what the market
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  economists were experiencing.
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  I think most of us, we were positively surprised.
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  There were quite a few updates in this MTBPS that shows that we are moving in the
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  right direction.
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  We are penciling in and crystallizing.
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  the gains that we've been talking about.
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  And that was positively welcome.
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  And then just on the minister, I could see that he was happy to be delivering a
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  budget that's not going to
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  result in him being crucified after that.
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  Well, it seems like a cautiously very good mood, not just from the minister, which
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  you said afterwards,
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  but also from the people that really matter.
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  And that's the analysts and fund managers, etc.
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  And speaking of fund managers, portfolio manager Adam Furlan. I see the
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  The Rand had a look at 17 to the US dollar straight into the speech, Adam.
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  It's retraced a little bit.
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  Bond market nice and steady as well.
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  So all quite well received before we get into details.
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  Yeah, Lindsay, definitely.
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  I think, you know, resounding outperformance in South African assets.
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  You know, the market was expecting some good news going into the budget,
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  but it definitely over-delivered on both inflation target as well.
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  as issuance and macro forecasts.
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  Just going back to your question on the minister's demeanour,
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  he did make an interesting joke around his opposition party minister not
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  walking out of this budget as he did in one of the prior budgets this year.
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  Oh, good touchy-feely stuff.
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  I like that.
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  Back to you, Ceesan.
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  I think the big news, of course, is what everyone expected, the inflation target
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  being lowered.
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  but was there any detail?
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  in that announcement that surprised you or surprised you and your group of analysts?
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  I think from our part, the direction and decision to target a point target of 3%
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  with that tolerance ban wasn't surprising.
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  But some of the analyst community expected that to only come in February.
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  But the fact that it was front loaded to the MTP APS was the positive sort of
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  surprise.
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  Yeah.
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  Any other surprises staying with you, Sisa?
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  I noticed that there was a note from...
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  An investment bank saying room for revenue growth.
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  Was that a feature for you?
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  Yes, it was.
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  This is what I've penciled into my numbers.
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  The Treasury numbers are on the conservative side.
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  They only have about 19 billion rand revenue overrun for this fiscal year.
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  As you would have seen in newspapers about two weeks ago, Mr.
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  Edward Kisweta, Commissioner, saying that 18 is where we are from a revenue overrun
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  perspective.
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  This means that any of the Commodity prices that we're seeing currently have
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  not been factored into
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  revenue collection.
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  And therefore, as the December company income tax numbers come through,
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  and there we expect to start seeing the commodity price performance come through,
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  then there is room that that revenue could be revised to the upside.
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  So they have been conservative on that.
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  I'm going to come back to that commodity story with my next question, but that's
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  after Adam. So, Sisa, hold on to that thought,
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  if you would.
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  Adam, it's been a great year for the bond market, especially straight after the U.S.
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  Liberation Day, so-called, the U.S.
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  tenure going from above 11% to its current level of around about, I don't know, 8.7%,
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  something like that,
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  that ran nice and steady.
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  Do you see that continuing or was all this factored in, all this good news from the
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  MTBPS, was it already in the market?
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  The good news from the MTBPS was somewhat, you know, beginning to come into the
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  market.
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  I definitely don't believe it is fully priced in.
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  You know, you spoke to surprises, you know, from this document today.
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  One announcement that definitely caught us by surprise was the issuance reduction.
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  The Treasury has opted to reduce the weekly nominal auction amount by 750
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  million rand per week
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  from 3.7 to 3 million in nominal bond issuance per week.
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  We were expecting about half of that and our expectation came on the back of the
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  fact that
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  Treasury is generally quite conservative in their issuance strategy and would have
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  preferred to build up more cash ahead
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  of upcoming reductions.
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  I think the more bold move from them definitely speaks to their confidence in
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  their ability to collect on tax
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  revenues going forward, the performance of SARS as well as the demand that they're
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  seeing for.
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  various types of other funding that they have included in their funding mix over
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  the past two to three years.
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  And they are reaping the benefit of that from quite a strong bond market reaction
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  to that news.
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  We see yields on the long end of the curve, almost 20 basis points lower post
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  the MTBPS announcement.
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  Yeah, I was going to ask you about that issuance story.
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  Which part of the curve has it affected?
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  You said the long end doing very well.
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  Is that at the expense of the short end.
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  The short end is also lower.
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  So five year bonds, about six basis points lower on the day.
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  But definitely, you know, this move impacts the longer dated issuance or the
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  longer dated part of the curve far more.
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  And that's where the majority of issuance actually comes through.
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  Therefore, we're seeing an outperformance there.
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  Very good.
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  Cesar, I promised I'd come back to you on the commodity story, because if you look
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  at the history of the RAND and you look at the history of the South African fiscus,
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  if it's good, it's usually...
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  which coincides with a boom in commodity prices and miners doing well and miners
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  paying more taxes,
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  money coming in from the sale of raw materials, etc.
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  Do you think that we're at the start of that?
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  Or was it hinted by the finance minister that he thought that we were perhaps in a
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  commodity upcycle and good times are
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  still ahead of us?
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  I think, as I highlighted, they decided to take the more conservative stance.
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  They kind of highlighted that the commodity prices where they are could be
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  once off,
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  and therefore they don't want to bake that into the numbers.
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  But I think even at these prices,
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  we will still get a revenue overrun of close to $20 billion next year, and that's
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  what we've baked into the numbers.
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  On their side, they've been conservative and they've baked in none of that, so we
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  think there is an upside that they could experience from that.
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  Very good.
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  Just sum up then, Cesar, if you would, before I go to Adam.
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  Just sum up your assessment.
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  of the MTBPS today from an economics point of view?
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  Thank you, Lindsay.
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  So I think it was a very good policy document.
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  The fiscal path and fiscal numbers themselves showed an improvement,
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  which is what the endless community was expecting.
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  But more beyond that is that it showed progress on reforms, like, of course,
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  the inflation target, which had been a question mark.
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  between the Saab and the National Treasury.
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  So that's now done and dusted.
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  It showed progress on the targeted and responsible savings program, which they
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  instituted a couple of months ago,
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  where they are aiming to close certain programs that are not yielding the
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  intended results anymore.
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  We've heard previously that CETA's were under consideration.
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  Now that has come into the baseline, that CETA's have a budget of close to 25
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  billion rand.
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  and the savings that could be had from that.
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  And also, I think quite excitingly,
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  is this procurement dashboard where the minister talks about every tender in the
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  government system,
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  in provincial and national, being for public consumption, the ownership of the
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  companies that get the tenders,
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  the details of the transactions of the tenders,
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  and this will really reduce the rent-seeking behaviour that we've been
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  seeing in tenders.
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  So I think that's quite...
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  positive going forward.
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  Adam, your summary, please, steady as she goes.
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  The trend is your friend, but this time backed up by fundamentals, I think.
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  Yeah, most definitely.
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  I think, you know, the bond market is going to continue to perform well on the
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  back of this.
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  You know, two to three main factors, the first being, you know,
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  the alignment of national treasury or fiscal policy with monetary policy on the
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  3% inflation target.
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  That's going to, you know, bring down inflation expectations a lot more quickly
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  and reduce the sacrifice.
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  You know, the issuance reductions, less of a burden on the bond market itself.
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  And, you know, finally, the Treasury have been able to move to this target due to
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  the strong performance
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  of in-year fiscal revenues as well as expenditure.
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  They've been able to move to this new target on their macro forward-looking
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  forecast with limited impact on
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  the consolidation trajectory and the rating agencies over the coming quarters.
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  Adam, thanks very much for your time.
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  Adam Furland is a portfolio manager at 91.
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  And Cesar, thanks to you too.
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  Cesar Mkele-Kourbis is economics analyst at 91 as well.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors and do not reflect the policy,
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