You're listening to Strictly Business Podcast with Lindsay Williams. South Africa's midterm budget policy statement has been delivered by the minister. It's the MTBPS or mini-budget. With me now to have a look at it is Adam Furlan, Portfolio Manager at 91 in Cape Town. I always like to ask Adam what the mood of the minister was in delivering that speech. It gives me an idea of what might or might not be coming. Hi Lindsay.
I think the minister was fairly jovial in his speech, actually laughed a bit during the speech. And I think they are quite confident and happy with the way things are panning out in the fiscal outlook. Yes, I think this year, which is slightly different from previous years, is the cautious sense of optimism with the government of national unity and a more guaranteed flow of electricity into the industry and also into households. but there are still nagging doubts, aren't there?
What was the main focus? Give us some of the nitty gritty, if you would. So I'll start with, you know, there was quite a big, you know, shift towards infrastructure in this budget. Not, you know, in current year spending or anything like that, but a big piece in the actual document talking about how they will fund future infrastructure projects, you know, sort of off balance sheet.
And. encourage private participation in those, which has been somewhat of a blockage and a constraint on new infrastructure in the past. That is quite promising. In terms of the nitty-gritty for this year, not too much actually changed from what the budget we saw in February 2024. Slight revenue undershoots relative to what they expected earlier in the year, and that was predominantly on the back. of VAT refunds actually running higher than expected.
And we actually think that they are being a little bit conservative on additional tax from personal income tax due to the two-part system, which is already running ahead of what they are expecting. On the expenditure side, they are also having a little bit of slippage there. They are giving some additional support to Sanrel to finalize the payments for the... toll projects in Hau Teng. And, you know, all in all, nothing major.
Ultimately, we think, you know, the fiscal strategy from 2024, from February 2024, is very much in line with what they expected. Let's go back to the infrastructure, if we can, because it's all very well saying, yes, we're going to concentrate on infrastructure, because infrastructure long term is very good for the economy. And it also creates jobs. But on the other hand, was there any detail there? In other words? this is what we're focusing on.
We're focusing on roads or hospitals or whatever it is. Did he say anything about that? Yes, so there was a full chapter dedicated to their plans regarding infrastructure investment and how they plan to finance it. They plan to develop special purpose vehicles for infrastructure investment where they can sort of guarantee first loss tranches and then allow... you know, developmental financial institutions or, you know, jet funding into that vehicle.
Also talk about reforms, you know, in banking regulation to allow for securitization of infrastructure assets to make them more digestible for the asset management industry or pension fund industry. You know, something we're quite excited about with the launch of our 91 infrastructure fund. Very good. Now, if you say to somebody in the street or at a trading desk or whatever, you say, what would you like to hear from the minister?
They would talk about the unemployment situation, which is dire, sluggish growth and guaranteed supply of water and electricity in not just the short term, but the medium and long term as well. Did you tackle those really big issues? Yeah, so I think the thing we forget is there has been and is ongoing. A lot of reform in the South African economy and, you know, electricity reform, transport and rail reform, as well as water reform is all currently, you know, on the agenda.
Bills are being passed in Parliament and, you know, most recently the water regulation bills have been put out for public comment and are expected to be sent back to Cabinet to be signed later this year. These main areas are being addressed by government. And, you know, that's going to enable, you know, critical infrastructure like energy, transport and water, you know, to be better functioning going forward.
Because what you're really saying here is there's been no big bombshells, nothing to scare you, but nothing to infuse you too much. You say you're excited because of the 91 infrastructure initiatives. When you look at the market, the market's immediate reaction, just tell us about the very sort of short term knee jerk reaction. And then we'll talk about going forward. So what happened today after the speech? Yeah, so the market's immediate reaction was negative. We saw bond yields move higher.
We saw the RAND also move about 15 cents weaker. That was, you know, the immediate reaction was due to, firstly, a wider deficit this year. And also, the market had built in some optimism around the potential for issuance reduction, which didn't transpire. That's all sort of calmed down already. And we're seeing the market, you know. Fairly close to levels, you know, closing levels at yesterday's market close. So not a significantly market moving budget.
As I said, not too much has changed in the underlying fundamentals. But maybe the market just built up a little bit of too much optimism into this event. And we obviously do have a big risk event coming up in the coming week. Okay. Yes, we do. Adam, is there anything that will mean that you and your team will be sitting down this evening or sitting down tomorrow morning and saying, Okay.
we need to change our exposure to certain asset classes, whether it be the bonds in whatever duration they are, whether it be the RAND or even other asset classes, anything there to change your current positioning? From the budgets today, not particularly. We have, you know, after a very strong rally in fixed income, we have, you know, reduced our risk ahead of the US elections next week.
And, you know, once we have some clarity, around that outcome, which is extremely important and extremely uncertain about the policy outlook from that economy that affects us so heavily. Once we have some clarity there, we will then look to adjust positioning and hopefully be in a position to re-engage in what we think is still good value in South African fixed income. Adam, thank you very much for your analysis. That's Adam Furlan, portfolio manager at 91 in Cape Town.
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