Earlier this month, our Chief Sustainability Officer, Nazmeera Moola, spoke with the Governor of the South African Reserve Bank on South African inflation and monetary policy in the context of the global and local economies. Building on his insights, Vivienne Taberer, Investment Director at Ninety One, and members of our investment team examined our own perspectives on our country, from the politics of the GNU to what is priced into our fixed income markets.
Nazmeera set the scene by reflecting on the contrasting approaches between emerging market (EM) central banks and their developed market (DM) counterparts in how they responded to the post-COVID surge in inflation. She pointed out that the South African Reserve Bank (SARB) – like other EM central banks – was more proactive than its DM peers in this cycle.
This is an observation that Governor Kganyago quite emphatically reaffirmed. He shared an interesting anecdote from the recent Jackson Hole Symposium, where US Fed Chair Jerome Powell noted that the "Team Transitory" ship, predominantly filled with DM central bankers and economists who believed the post-COVID surge in inflation was temporary, found itself caught in the storm of much higher and much more prolonged inflation. Fortunately, all the passengers were rescued with other vessels.
In contrast, EMs such as Brazil were among the first to raise interest rates in 2021. This proactive stance stemmed from their historical experience with high and volatile inflation, unlike developed economies, which were complacent and reacted much later. It is also worth noting that because EMs were ahead of the curve in responding to inflation, disinflation happened much quicker relative to the developed world. Some EM central banks began their easing cycles around mid-2023.
Vivienne, thinks this observation is quite pertinent – emerging markets, and within them South Africa, have managed both their fiscal and monetary policy conservatively. This has positioned South Africa well and combined with the current positive political momentum, we have been outperforming our emerging market peers.
Since Paul Volker focused on taming US inflation in the 1980s, central bankers have known that they should deploy the instruments available to them to tackle inflation. Emerging market central banks remain acutely aware of this. As Governor Kganyago noted: “We are in Africa. When there is a snake in the house, you deal with the snake. The SARB deals with inflation, irrespective of whether it emanates from the demand or the supply side.”
Governor Kganyago emphasized the SARB’s focus on independently setting monetary policy tailored to South Africa's unique economic needs, rather than simply reacting to the US Federal Reserve's actions. This approach aligns with the SARB's commitment to addressing inflation, regardless of its source.
Lisa MacLeod, Portfolio Manager, Emerging Market Fixed Income, agrees with the Governor but believes the current strength in the currency, if sustained, could result in significant revisions lower in the SARB’s inflation forecasts. There are, however, tail risks that could derail this. Although overall oil demand globally is muted, oil price vulnerability is a risk given the conflict in the Middle East situation. The US election is another potential spanner in the works in terms of trade policy, especially in the event former President Trump returns to power.
While trade policy and the risk of tariff hikes dominate the US election news cycle, the fiscal posture of the US is more concerning than the potential inflationary impact of tariffs (irrespective of who takes over the Oval Office). The Ninety One team is focused on what the fiscal stance means for the US debt trajectory, how that then impacts US bond yields and the potential for a general repricing of financial assets across the world.
Adam Furlan, Portfolio Manager, Emerging Market Fixed Income, contrasted the Governor’s concerns about the US with the situation in South Africa, where despite 2024 being an election year, the South African National Treasury delivered an austere budget. The government showed fiscal restraint, particularly regarding the public sector wage bill. He expects more of the same going forward and for the country to pursue a path of debt consolidation. In addition, he says the team is starting to get more excited about fiscal revenue following a challenging period. This could bode well for reductions in issuance and ultimately be a strong impulse for further local bond market performance.
The Governor reiterated that the local fiscal policy stance influences the country’s risk premium and therefore, affects monetary decisions. They therefore factor fiscal policy into their considerations. While it is natural to get excited about positive revenue surprises, we were reminded that South Africa has not effectively utilised past revenue overruns, most recently the 2022/2023 commodity boom. Therefore, fiscal consolidation remains ever important.
Nkumeleni Thavhiwa, Managing Director, Emerging Market Fixed Income, is positive on the direction of travel for growth in South Africa and the durability of the GNU. He believes that while disruptions at the local level, including conflicts within municipalities, present challenges to the current arrangement, sentiment overall remains positive.
Ultimately, the economic prospects of South Africa rest on the implementation of structural reforms. The joint agenda, particularly regarding initiatives like Operation Vulindlela, has been instrumental in promoting unity, ensuring that reform efforts continue to gain traction despite political and ideological divergences.
If this proves correct, higher growth will lead to higher revenue growth. If that is optimally handled, it will promote budget consolidation and ultimately provide room for the Reserve Bank to cut interest rates more than is currently forecast.