<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
JIMMY MOYAHA: With the growing volatility around the world, markets are often looking for a good indicator of whether or not some economies are performing better than expected.<\/p>\n
We\u2019re going to be taking a look at South Africa\u2019s key indicators in our own bond market in a bit more detail, with the head of SA fixed income at Ninety One, Mokgatla Madisha. He joins me on the line now to see what we make of these developments.<\/p>\n
Ntate Madisha, lovely having you on the show. Thanks so much for taking the time.<\/p>\n
Let\u2019s perhaps start with the conversations that have been coming out of National Treasury \u2013 most recently Director-General [DG] Duncan Pieterse at Treasury noted that South Africa\u2019s bond market effectively gave an indication to the market that South Africa had been upgraded even before the ratings agencies like Fitch and Moody\u2019s confirmed that.<\/p>\n
What do you think led to those statements by the DG?<\/p>\n
MOKGATLA MADISHA: The South African bond market has performed very, very well over the last two years \u2013 and even the beginning of this year, we saw them continue to outperform.<\/p>\n
I think there are a number of things one can look at. For sure, when the DG spoke last week, he was referring to the credit spread of South Africa\u2019s dollar bonds over the US bonds.<\/p>\n
But there have been a number of other indications that show that the bond market is effectively giving SA a ratings upgrade.<\/p>\n
One need only look at the steepness of the curve.<\/p>\n
By that I mean the spread between the longer-dated bonds and the shorter maturities, which has come from very high levels at the beginning of last year, with a 30-year and less five-year coming in from about 285 basis points, currently closer to 100 basis points, for example.<\/p>\n
Those are the kinds of indicators that show that investors have become a lot more confident about South Africa\u2019s fiscal outlook.<\/p>\n
JIMMY MOYAHA: Mokgatla, speaking of that fiscal outlook, just today, National Treasury confirmed, of course, the official dates for the tabling of the Medium-Term Budget Policy Statement [MTBPS], and alongside that, we are expecting that an update on our fiscal strategy will be provided there.<\/p>\n
If we are to look ahead to an event like that, it is set to take place in October, and we\u2019re a bit further out from that, what has been actually driving our fiscal improvement up to this point in time?<\/p>\n
We know commodities have had a good run. We know that structurally, though, South Africa has been looking better, the rand has performed better as well. It\u2019s held its own against some of the major currencies.<\/p>\n
What\u2019s been driving the big fiscal improvements that we\u2019ve been seeing?<\/p>\n
MOKGATLA MADISHA: Well, even before the MTBPS on 21 October, as you indicated, we\u2019re going to be looking forward to quarter two GDP numbers. With that, we expect a rebasing exercise to be to be announced or the result of the rebasing exercise.<\/p>\n
Up to now, what we\u2019ve seen is personal income tax [PIT] running quite far ahead of budgeted numbers.<\/p>\n
Also, as you point out, on the company side, company tax has been buoyed by strong commodity prices as well.\u00a0But one need also look at Vat [value-added tax], which is running ahead of expectations.<\/p>\n
So there are a number of questions that need to be answered. Where is this performance coming from?<\/p>\n
JIMMY MOYAHA: Mokgatla, speaking of questions that need to be answered, when I think about the ratings agencies that we mentioned earlier, the likes of Moody\u2019s, S&P [Standard & Poor\u2019s], Fitch, they\u2019re almost lagging behind in how it is that they report on information and data.<\/p>\n
I suppose to a certain extent that can be to our favour, to our benefit, if we think about the fact that some of their ratings decisions come after some improvements and not necessarily in anticipation of things that may or may not pan out.<\/p>\n
All of the ratings agencies have expressed a common consensus that they are viewing South Africa as stable at the moment, but they haven\u2019t yet upgraded our outlook and upgraded us fully to at least even returning back to investment grade.<\/p>\n
What\u2019s it going to take for us from a fiscal perspective, to start to perhaps sway their minds in that direction?<\/p>\n
MOKGATLA MADISHA: Well, I would say S&P was the first out of the blocks in November last year, upgrading South Africa\u2019s rating from a double-B-minus [BB-] to a double-B [BB], but they also upgraded us to a positive outlook, and we\u2019ve seen Moody\u2019s and Fitch follow suit.<\/p>\n
So in that respect, initially they weren\u2019t behind the curve, as we would say.<\/p>\n
But where we are now, given where the market is, the market is definitely pricing South Africa as if it is already [at] double-B-plus [BB+] type level.<\/p>\n
From here onwards, I think we need sustained, strong growth. I think National Treasury has shown its commitment to fiscal sustainability by pencilling in primary surpluses, and now we have a history of that. So that\u2019s good.<\/p>\n
But from here, we need growth to be stronger. We particularly also need debt levels to be substantially lower than where they are.<\/p>\n
If you look at triple-B [BBB] countries in general, [they] have debt-to-GDPs closer to the 55%.<\/p>\n
South Africa is sitting at a debt ratio of about 78%. We\u2019re still quite a long way away from where the median investment grade country is.<\/p>\n
That\u2019s not to say that we have to get to that level to get a rating upgrade into investment grade. But certainly, we would have to be substantially closer to that level and the trajectory on growth would have to be significantly stronger than currently.<\/p>\n
JIMMY MOYAHA: Mokgatla, before I let you go, I want to take a look at the recent decisions by the Monetary Policy Committee [MPC] of the central bank of South Africa. We know that interest rates form a critical part of the bond market and the fixed income landscape, and I want to take a look at the most recent interest rate decisions.<\/p>\n
In May, we got the first rate hike after quite a considerable period of time. In July, we got a surprise rate hold where we thought we would get another hike.<\/p>\n
What do these decisions mean for the bond market, and how does the bond market typically interpret or anticipate that these decisions will impact investment flows?<\/p>\n
MOKGATLA MADISHA: Well, if you look at the decision in July, it was a surprise, as you point out.<\/p>\n
However, we must understand that the backdrop is very, very uncertain. While we have been changing our minds every day, the Sarb [South African Reserve Bank] doesn\u2019t.<\/p>\n
Since the May action, they had seen the memorandum of understanding between the US and Iran signed \u2013 that led to almost a collapse of oil prices. So the inflation outlook was looking significantly better.<\/p>\n
But just before the July MPC, it looked like hostilities were rearing their ugly heads again.<\/p>\n
So the environment continues to be one of great volatility and in actual fact, there\u2019s very little that monetary policy can do about the immediate outlook for inflation.<\/p>\n
However, when you take a slightly longer-term view, that being 12 to 18 months over which monetary policy is effective, you will notice that even at the current level of repo rate and projected inflation, real interest rates are not that negative actually, and are quite consistent with bringing inflation down more gradually in the medium term.<\/p>\n
So yeah, I think initial disappointment, but the backdrop is highly uncertain. Right now, we\u2019ve seen oil come back from that 90 [$] level, towards 80 and now back again. So in the medium term, I think the market will give them some grace.<\/p>\n
JIMMY MOYAHA: In uncertain times, bond markets can often provide investors with some very useful insights as to where investor sentiment might be sitting around a particular economy. South Africa certainly is testament to that.<\/p>\n
For now, we\u2019ll have to leave this conversation on that note. Head of SA fixed income at Ninety One, Mokgatla Madisha, joining us take a look at recent decisions in the market and how they could have potentially affected the bond market.<\/p>\n
Brought to you by Ninety One.<\/p>\n
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.<\/p>\n
#SAs #bond #market #pricing #upgrade<\/p>\n","protected":false},"excerpt":{"rendered":"
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