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The Asset Class: Ruen Naidu · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  2025 was a pretty good year for South Africa.
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  There was stability across many metrics and a sometimes cruel world began looking
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  at the country favourably.
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  And also financial markets, well they had a really good year, particularly
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  government bonds.
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  They had an excellent year.
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  2026 was a year to look forward to therefore.
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  And then of course came the war in Iran by the US and Israel, but South Africa.
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  was better prepared to absorb the shock than it has been in the past.
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  And at the end of May, Moody's raised its credit rating for the country to positive
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  from stable.
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  With me now is Ruan Naidoo, Portfolio Manager at 91 in Cape Town.
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  Interesting timing for Moody's, Ruan.
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  Why did they do it now?
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  Yes, let me just step back and give you some context to this Moody's decision.
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  So South Africa has been a sub-investment grade rated country.
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  ever since 2020 when Moody's was the last rating agency to take us into
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  sub-investment credit.
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  Since then, we've had positive turnaround in our fiscal picture due to very
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  conservative
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  and very constructive budgets out of national treasury, very strong spending
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  constraint as well.
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  And what this has meant is that we've seen an improvement.
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  And in February of this year, S&P...
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  was the first rating agency to upgrade our rating to two notches below investment
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  grade and
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  retain a positive rating outlook.
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  So this put them on the same footing as Moody's at BB flat.
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  So what Moody's has done last week is just upgrade the outlook to positive.
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  And that really is an acknowledgement of the steadfast commitment to fiscal
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  consolidation and to getting out.
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  debt to GDP trajectory lower over time, as well as the ongoing policy reforms, you
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  know,
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  supporting this revision.
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  And also a pretty steadfast affirmation of the work of the South African Reserve Bank
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  as well.
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  I mean, Lesecha Kanyago has recently given a speech highlighting the role of monetary
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  policy when
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  combating external shocks, for example, and it was very well received.
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  And the South African Reserve Bank in the face of global inflation headwinds and
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  local inflation headwinds as well.
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  has sort of got ahead of the curve.
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  It's acted early, and that's been very well received.
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  Yes, completely.
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  So entering this crisis, the backdrop was that we had moved our inflation target
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  from
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  4.5% to 3%.
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  At the same time, we were retaining a policy rate or a repo rate at around
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  6.75%,
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  which means a very attractive, positive real interest rate setting by the Reserve
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  Bank.
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  What this was able to achieve was also a lowering of inflation expectations.
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  So the BER inflation expectation survey had the two-year out forecast at
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  a very low 3.6%, which is a real affirmation of the
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  Reserve Bank's aims to anchor inflation at 3%.
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  So what this meant was that coming into this crisis, we had high positive real
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  interest trades,
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  which meant that
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  The Reserve Bank was able to skip a hike at the March meeting on the back of huge
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  uncertainty about what was going to happen with the Strait of Hormuz.
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  But now those hopes of an early opening have clearly faded.
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  And that uncertainty has actually turned to more certainty that we're going to have
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  an extended period of higher oil
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  prices.
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  So not only has the Strait remained closed.
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  But we've also seen infrastructure damage and a depletion of stocks that will have
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  to be replenished in terms of oil
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  inventories.
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  And all of this means that oil prices and output prices from that gulf are going to
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  be
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  elevated for some period of time.
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  So the Reserve Bank has decided to hike interest rates by 25 basis points at the
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  last MPC
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  meeting.
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  And might actually hike again in the next meeting,
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  just to keep inflation expectations anchored and to prevent second round
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  effects from spilling through the rest of the basket
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  of inflation.
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  So monetary policy seems to be in good hands.
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  What about the fiscal side of things?
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  How is South Africa performing?
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  Because obviously, that's part of the Moody's decision as well.
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  Fiscal stability?
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  Yes.
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  Debt to GDP in South Africa has stabilized,
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  and this is the first time it has stabilized since the 2008 global financial
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  crisis.
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  For the last three years, South Africa has been able to post a primary surplus.
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  That means excluding our interest costs.
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  The government is spending less than it takes from revenue.
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  So that clearly demonstrates that South Africa is able to achieve, deliver on
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  fiscal targets,
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  as well as structural reform.
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  Of course, now we enter a shock and there are some buffers.
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  So, for instance, some of this fiscal space that we have has been used to
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  support the consumer.
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  the removal of fuel taxes for a brief period of time.
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  That's going to cost the fiscal $17 billion.
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  But our fiscal performance still reflects continued improvement.
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  You know, if we look at just the most recent annual deficit, so the main budget
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  deficit,
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  you know, government estimated that it would be 4.6% at the end of February at
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  the budget.
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  It turned out to be 4.3%. So we outperformed last year's budget.
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  And then starting this year, you know, the first month of the fiscal year, April,
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  confirms this outperformance is intact in that tax revenues were 5.9 billion higher
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  than
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  was actually forecasted.
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  So that's the revenue side of things.
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  And then if you turn to the expenditure side of things, that's also very well
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  anchored and somewhat insulated from higher inflation.
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  You know, a big portion of our expenditure goes to public sector wages.
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  And that has, it's governed by an agreement that lasts until 2027 to 2028.
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  So that should be insulated from the increase in inflation.
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  And then there have been other improvements across the board in terms of
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  improving the quality of expenditure
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  and reducing wasteful expenditure.
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  One of the positive consequences of the closure of the Strait and the war on Iran
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  is certain commodities doing rather well.
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  certain commodities that have strong South African links.
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  I mean, for example, coal is well above its historic average, as is gold.
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  So that has implications, of course, for terms of trade.
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  They're a tailwind, but of course, they're cyclical.
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  They are cyclical.
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  You know, you could look at, for instance,
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  gold as potentially being part of a broader central bank diversification
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  strategy that is
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  diversifying away from extensive dollar exposure.
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  So that might have more endurance over the medium term in terms of its upward trend.
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  Of course, in the short term, it would be governed by excessive positioning and
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  retail optimism around
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  that asset class.
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  But over the medium to long term, that should remain intact.
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  The other commodities to mention, platinum and palladium,
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  have seen remarkable increases over the last year.
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  And what this has really meant for South Africa is that...
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  You know, from a currency perspective,
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  our export basket has insulated the increase in oil prices.
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  So, terms of trade, which was a massive tailwind for the South African rand last
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  year,
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  is actually acting as a source of support this year and actually keeping the
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  currency
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  quite well behaved compared to what you might have thought, given the largest
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  disruption to energy supply.
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  supply since the 1970s.
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  What about food?
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  Food inflation affects South Africa at two levels.
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  At street level, of course, everyone's basket goes up.
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  But what about the macro level as well?
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  Is this a red flag for you, food inflation, Ruan?
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  Food inflation is a concern and it remains a concern of the Reserve Bank as well.
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  So it's important to note that they have their focus on this particular aspect of
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  the basket.
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  I think the outlook for food prices...
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  has started to deteriorate largely because of fertilizer shortages and
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  also because diesel is a massive part of the food supply chain.
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  Your products have to be transported from place to place and that has a diesel input
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  cost.
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  And some farmers have said at these prices, it's probably not worth planting
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  for the next season.
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  And that's just part of it, the Strait of Hormuz and its impact on food prices.
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  Then there's another part of it, which the Reserve Bank have their eyes on.
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  And this is the potential formation of El Nino weather system.
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  Now, this could bring drought next year to various parts of the country.
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  So it does remain a concern.
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  And this will be one of the hawkish elements within the central bank's
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  forecast outlook.
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  My final question to you, Ruan, is this.
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  How long can South Africa survive with an oil price between $90 and $100 per barrel?
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  The state of Hormuz, as you said earlier on, doesn't look like it's going to be
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  free.
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  to shipping anytime soon.
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  So if oil remains elevated or, heaven forbid, goes even higher, when does it
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  become a serious problem for South Africa?
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  That's a difficult one to answer.
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  You know, the economies have proven to be remarkably dynamic.
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  You know, if you had told any oil analyst that the Strait of Hormuz would be closed
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  for three months,
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  you know, they would have told you that oil is going to $150 to $200 a barrel.
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  So why hasn't it gone up there?
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  There are two main pieces to that.
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  One is that inventories have been drawn down aggressively and that supported the
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  market.
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  And the other is that there's been demand destruction, particularly in Asia, where
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  you've seen a reduced demand.
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  For instance, China now imports five million barrels less per day than they
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  used to.
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  So that's potentially how it would manifest in South Africa as well.
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  You would have to see massive demand destruction.
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  And, you know, that should feed through into the growth outlook in SA more than
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  anything else.
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  we are comforted that the central bank will...
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  will lean against any second round effects from energy price disruptions.
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  But yeah, the pain would be felt in our growth outlook.
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  And then it would come down to really whether fiscal policy remains committed to
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  keeping the debt
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  trajectory on a downward outlook.
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  And we remain convinced of that in line with the rating agencies who, you know, as
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  I said earlier,
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  have decided to put us on positive outlook despite this shock.
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  Ruan, thank you very much for your insight.
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  Ruan Naidoo is a portfolio manager at 91 in Cape Town.
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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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  position or opinion of any other agency, organisation,
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  entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
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  change,
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  revision and rethinking at any time.
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  Please do not hold us to them in perpetuity.