You're listening to Strictly Business Podcast with Lindsay Williams. South Africa's postponed budget speech 2025 has finally been delivered. With me is Adam Furlan, Portfolio Manager at 91 in Cape Town. Adam, let's get short term first of all. What's the market response been? Because the two instruments that are the most sensitive, I suppose, are the South African rand and also the bond market. Thanks, Lindsay. Yeah, market response to the budget. But it looks to be positive to me.
What we're seeing is an outperformance of the long end of the curve. So that's the fiscally sensitive part of the curve. And that's telling me that the market is happy that the budget that has been represented shows consolidation, no new additional borrowing compared to what was presented two weeks ago, despite... having less revenue measures in the form of VAT. From an FX perspective, the RAND has remained quite stable.
It's moving around more in line with what's happening with the US dollar than to local factors. But there was some risk premium built in in the lead up to the budget as we are still uncertain about whether or not this will be approved in Cabinet. And that risk premium remains in the currency at the moment. That's the short-term response. What about the longer-term sentiment?
I mean, you haven't had a chance yet to probably get into the real nitty-gritty, and you'll be sitting down with your team at 91 tomorrow, no doubt, and saying, well, look what they've done. Is the long-term sentiment a positive one? I think so. I think the positive signals we can take from this are the elements of the budget that the GNU has completely agreed on. And we see... No change to the initial increase in infrastructure spending that was tabled in the first budget.
So that is a cumulative $47 billion increase over the next three years for an allocation to infrastructure. That is something the GNU are aligned behind. And probably the most important thing that the GNU are aligned behind is the fact that they do not want to borrow additionally in the market. They don't want to increase levels of debt. And they do want to start consolidating our debt to GDP level and peaking in fiscal year 25, 26.
And those are very positive signals, both for growth and for debt sustainability from the fiscus. Do you think the rift has been healed between the various parties in the GNU, given what happened a couple of weeks ago, Adam? Because it's terribly important to send out a unified message. So do you think the message that has been sent out is good? bad or indifferent? At the moment, it's still quite uncertain. So I'm going to say indifferent, that we have come back and seen a compromise.
And I think that in itself is positive. However, it is not clear that this compromise is enough or has been agreed upon just yet. So I'm going to say it's an indifferent signal until we do see some more clarity on whether all parties can agree to the newly presented budget. The bigger picture of fiscal consolidation and debt being addressed, was that also addressed to your satisfaction? I would say almost. I mean, we would prefer, you know, a faster debt stabilization profile.
But, you know, it is a tough environment for the Treasury. They do have spending pressures that they, you know, are somewhat out of their control. And we think the budget that they have prioritized, a bit of growth spending, increased a bit of taxes to fund that and not let the deficit widen, is a very good outcome. Although we'd obviously like to see a faster consolidation profile and a bit more allocated out of non-growth expenditure into longer-term growth-positive expenditure.
What about bigger macro issues, Adam? What about GDP growth? was it addressed? What about inflation? Was that also mentioned? GDP growth, you know, they have revised up slightly their GDP growth assumptions. And very much, you know, GDP growth would be on the back of, you know, the infrastructure and reform agenda that is under Operation Bulindlela. So that is very dependent on, you know, those reforms happening and working. as they expect.
And we do see the possibility for South African GDP growth to realize close to 2% over the medium-term experiential framework on an annual basis. That would be quite positive. On the inflation front, we have been in a very benign inflation environment. The VAT measures that we've seen put in place in the new budget, so half a percent per year over the next two years, are not expected to have a significant impact on the inflation rate going forward.
The Treasury expects the VAT increase to add 0.15% to inflation, which is... which is not a meaningful impact in the current inflation environment. Talking about significant impact, has this, in your mind at the moment anyway, having just digested the budget, has this made a significant impact potentially for the positioning of the 91 Diversified Income Fund? Again, I said earlier on, it's probably a little bit too early, but what does your gut feel at the moment?
And if it's not going to change your position, what is your position at the moment? So in the diversified income portfolio, we have been overweight the longer end of the curve in the South African bond market. So the 20-year area of the curve sensitive to fiscal dynamics. That is because we see too much fiscal risk price into the curve. We do not think that this, you know, this disagreement within the GNU is completely negative.
It is actually... showing the ability of this government to function together and compromise on a budget that all parties can agree on. So whilst it is difficult and a bit volatile and uncertain in the short run, we think longer run this may lead to better outcomes. So we have increased our duration exposure to that long end of the curve in response to what we think is quite a reasonable outcome and quite a mature outcome from the beginning.
the first budget under the government of national unity. I sense cautious optimism, Adam. Thank you very much for your analysis. Adam Furlan is a portfolio manager at 91 in Cape Town. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position or opinion of any other agency, organisation, employer or company associated with StrictlyBusinessPodcast.com.
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