SARB interest rate decision: Not quite there, yet


Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

24 November, 2022: The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) opted to hike the repurchase rate by 75 basis points (bp) to 7.00% today. While the tone of the statement and the post-meeting Q&A was hawkish, the voting breakdown shifted towards the dovish (or rather less hawkish) side with the voting split 3:2 for 75bp versus 50bp. In the September MPC meeting, two members would have preferred a rather aggressive 100bp increment.

Heading into the meeting, the market’s pricing was split between a 50bp and a 75bp outcome, so the reaction from the rand and rates was minimal following the announcement. The forward rate agreements (FRA) curve flattened marginally, while the yield and swap curves were steady. The rand was also unaffected by the outcome, but has been trading slightly weak relative to the level on the US Dollar Index (DXY).

Relative to the SARB’s Quarterly Projection Model (QPM), the November rate hike was another front-loaded move. According to the QPM, the projected repo rate for the fourth quarter of 2022 was 6.30% compared to the 7.00% outcome from today’s decision. This reflects the committee’s views that upside inflation risks outweigh the weaker growth outlook. All else assumed equal, this front-loading should contribute to a stronger recovery in the exchange rate, weaker growth, and a lower inflation profile than projected by the QPM.

At 7.00%, the repo rate is in line with the steady state in nominal terms. However, with inflation running well-above target, the real policy rate is deemed accommodative. The MPC views the current monetary policy stance as being supportive of the economy and credit growth.

Given elevated uncertainty on the global and local inflation outlooks with concern focused on broadening pressures and the risk of inflation persistence, the SARB seems willing to take the policy stance into restrictive territory. As such, a further interest rate increase at the January meeting should be the base case.

The size of that increase will depend on how quickly inflation rolls over from the upside surprise in the October release, the details of the BER’s Q4 inflation expectations survey results, and the tone of the Federal Open Market Committee’s (FOMC’s) statement and press conference in December. Given the voting breakdown and the cumulative policy action implemented so far, a 50bp hike will be the most likely outcome. However, we cannot rule out a smaller hike of 25bp or even a pause, should it become clear that global growth strain and more rapid disinflation are set to ease local price pressures.

The market is currently pricing in a cumulative 50bp in hikes by March next year, which reflects the risk for a 25bp hike rather than a 50bp hike in January.


Caption: Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

An overly positive budget update amid significant uncertainty


Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

26 October, 2022: Finance Minister Enoch Godongwana’s second Medium Term Budget Policy Statement (MTBPS) painted a very positive picture of the medium-term fiscal position. Not only does the National Treasury intend to move to a primary budget (revenue less non-interest expenditure) surplus in FY23/24, it aims to grow the surplus over time. In so doing, it hopes to stabilise the debt ratio at 70% of GDP in the medium term, and to outright lower the ratio from FY26/27 onwards.

Rose-tinted glasses

We think there may be too much optimism embedded in these projections. This may be merely a placeholder budget, albeit on the bullish side of the risk distribution, given significant events between now and the February 2023 Budget Statement. Importantly, the ANC elective conference in December would affect the politics of the February budget, which may have constrained the ability and willingness to be more explicit on certain expenditure or revenue items. In addition, the Financial Action Task Force (FATF) grey-listing process is set to be concluded by February, which may also have received outsized attention in the lead up to the MTBPS.

The presentation of the current fiscal year was more realistic. The tax revenue overrun is estimated at R83.5bn, with the bulk coming from corporate income tax receipts, which is no surprise in light of elevated commodity prices and strong earnings rebound. Yet, more broadly, revenues have been doing well thanks to the wage recovery, better import growth, and stronger VAT receipts (even when adjusting for refunds). The deficit was revised from 6.0% of GDP to 4.9%, which was within the consensus forecast range. The market may find it difficult to believe that the government will be able to narrow the deficit to 3.2% of GDP by FY25/26.

There are few reasons for circumspection:

·       The Treasury expects growth to hold up (around 1.8% over the medium term) despite the current slowdown in the global economy, with some of the world’s largest economies – such as Germany and the UK – already skirting with recession. As growth in China and the US move well below trend, it is difficult to see how SA’s growth will hold up when we add in domestic monetary policy tightening and what seems to be a commitment towards fiscal consolidation.

·       Linked to more sustained, albeit still pedestrian, growth, the revenue overrun is carried forward to a large extent, which assumes either a longer-term tailwind from elevated commodity prices or better revenue collection elsewhere. While we agree that capacity rebuilding at SARS is bearing fruit, it may be a tall order to rely on this to sustain revenue at over 25%/GDP, which is well above the pre-Covid level of around 23.5% – 24.0%.

·       The FY23/24 numbers include the extension of the SRD grant (for 12 months to March 2024), but there is no provision thereafter for a permanent replacement grant.

·       The FY22/23 wage bill does not reflect the current, albeit partly, settled wage agreement of a 3% increase over and above the 1.5% pay progression and cash gratuity.

·       The Eskom debt swap is still short on detail and these additional funding costs are not yet included in the medium term expenditure framework. Granted, the debt transfer should limit the need for further equity injections and so reduce the funding associated with bailouts, but the debt that the government will take on will be more expensive than that issued by the government directly and so will add to the debt service bill.

But some room for comfort

Admittedly, there is a small cushion built into the numbers with unallocated reserves of R41.3bn in FY24/25 and R47.3bn in FY25/26.

There was conditional state-owned enterprise (SOE) support of R23.7bn for SANRAL, R5.8bn for Transnet, and R3.6bn for Denel. However, Eskom did not receive additional funding over and above what was budgeted in February. The government has committed to a debt swap with a vague quantum of around R130bn – R260bn, but given the composition of Eskom’s debt – ranging from ZAR to USD denominated, guaranteed to unguaranteed, and listed to DFI loans – ironing out the details will be no easy task.

The fixed income market might be somewhat disappointed by the lack of detail on the Eskom debt swap, as well as the fact that domestic fixed-rate and inflation-linked bond issuance will be left unchanged. Rather, the revenue overrun and excess cash balances will be used to lower foreign borrowing, as well as floating-rate issuance. This is potentially a missed opportunity for the government to lower the supply indigestion in the domestic bond market, given that issuance is being done at a substantial discount compared to a relatively tight spread on the 5-year government floating-rate note. Alternatively, the government may use the floating-rate note as a flexible issuance tool on an ad hoc basis and give the market certainty in keeping the fixed-rate and inflation-linked bond issuance unchanged.

Expenditure ceiling raised … again

The overarching negative message from the MTBPS was that the commitment to the expenditure ceiling should be questioned, as this has turned into a soft rather than a hard fiscal rule. It has been raised yet again, by R51.6bn in FY23/24 and R57.9bn in FY24/25. In addition, the line in the sand on SOE support has again been crossed.

Where we could be too pessimistic is on medium-term fixed investment growth and the government’s ability (and willingness) to crowd in the private sector. A stronger growth outlook would also be more plausible if there is clear evidence that deep-seated reforms are accelerating.

Overall, markets react positively

On the surface it looks as if the markets reacted positively to the MTBPS, but closer inspection reveals that the rally in SA’s bond yields have been driven more by the decline in US yields, while the stronger rand has been a function of the weaker dollar.

Within equities there seems to be more evidence of the beneficial budget, with banks doing relatively well, but on the whole, the local bourse as has also benefited from lower US bond yields, a weaker US dollar, and higher commodity prices.

Even though offshore drivers are dominating local market performance in recent trading sessions, this budget may be enough to keep the bond vigilantes at bay until the hard decisions are taken.


Declaration of Crypto Assets as a financial product


The Financial Sector Conduct Authority (FSCA) has published the declaration of Crypto Assets as a financial product under the FAIS Act, which was gazetted on 19 October 2022. The declaration, brings providers of financial services in relation to crypto assets within the FSCA’s regulatory jurisdiction.

On 20 November 2020, the FSCA published a draft Declaration of Crypto Assets as a Financial product under the FAIS Act, for public consultation. A total of 94 individual comments were received from 22 different commentators. Following this public consultation process, the FSCA published the final Declaration in the Government Gazette
and on the FSCA’s website.

The FSCA has also published a Policy Document supporting the Declaration. The Policy Document provides clarity on the effect of the Declaration, including transitional provisions, and the approach the FSCA is taking in establishing a regulatory and licensing framework that would be applicable to Financial Services Providers (FSPs) that provide financial
services in relation to Crypto Assets.

In addition to the Declaration and Policy Document, the Authority also published a general exemption for persons rendering financial services (advice and/or intermediary services) in relation to Crypto Assets, from section 7(1) of the FAIS Act.

The intention of the exemption is the following:

• To facilitate transitional arrangements for existing providers of crypto asset activities. The transitional arrangements entail that a person may continue to render financial services in relation to crypto assets without being licensed, provided that such person applies for a licence under the FAIS Act within the period specified in the exemption. The stipulated period is 1 June 2023 until 30 November 2022. The exemption will apply until the licence application submitted has been approved or declined; and
• To exempt certain ecosystem participants from the FAIS Act. These participants are crypto asset miners and node operators performing functions in respect of the security and health of the network as well as persons rendering financial services in relation to non-fungible tokens1.

To facilitate the application of an appropriate regulatory framework for Crypto Asset FSPs once licensed, the FSCA also published a Draft Exemption of Persons rendering Financial Services in relation to Crypto Assets from Certain Requirements. The draft exemption proposes to exempt licensed Crypto Asset FSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code of Conduct for Authorised Financial Services Providers (General Code) and their
Representatives and the Determination of Fit and Proper Requirements, 2017 (Fit and Proper requirements). Requirements contained in the General Code and Fit and Proper requirements will apply to all Crypto Asset FSP’s once licensed, except those requirements that they are exempted from in terms of the draft General Exemption.

The draft General Exemption has been published for public comment pending finalisation, to solicit stakeholder inputs on the proposed regulatory framework that will apply to licensed Crypto Asset FSP’s. Submissions on the draft Exemption must be made using the
submission template available on the FSCA’s website and be submitted in writing on or before 1 December 2022 to the FSCA at


Enquiries: Financial Sector Conduct Authority
Email address:
Telephone: 0800 203 722

1 The terms crypto asset miner, node operator and non-fungible token are defined in the published Exemption of persons rendering financial services in relation to crypto assets from section 7(1) of the Financial Advisory and Intermediary Services Act, 2002.

Crypto assets now included under definition of financial products in South Africa


By Ashlin Perumall, Partner, Baker McKenzie Johannesburg

FSCA Declaration
Crypto assets are now regulated as financial products in South Africa. On 19 October 2022, the Financial Sector Conduct Authority (“FSCA”), South Africa’s financial institutions regulator, issued a declaration (“Declaration“) that crypto assets are now included under the definition of ‘financial products’ in terms of the Financial Advisory and Intermediary Services Act, 2002 (“FAIS”). The Declaration also provides a wide definition for crypto assets, being a digital representation of value that:

  • is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment or other forms of utility;
  • applies cryptographic techniques; and
  • uses distributed ledger technology.

The effect of the Declaration is that any person who provides advice or renders intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider, and must comply with the requirements of the FAIS Act. Under FAIS, ‘advice’ includes recommendations, guidance or proposals of a financial nature furnished by any means or medium in respect of a defined financial product. ‘Intermediary service’ includes any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier with a view to:

  • buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
  • collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or
  • receiving, submitting or processing the claims of a client against a product supplier.

Exemption Application
Ordinarily, in terms of section 7 of FAIS, a person may not act or offer to act as a financial services provider unless such person has been issued with a licence by the FSCA. The FSCA has set applicable licences which an FSP would generally require, which are divided into different categories of licences. The full list of categories can be found here. However, on 19 October 2022, the FSCA also published notice 90 of 2022 exempting certain persons who render a financial service in relation to crypto assets from the application of section 7(1) of FAIS. In order for the exemption to apply, the relevant persons are required to comply with the following:

  1. submit an application to the FSCA between 1 June 2023 and 30 November 2023
  2. comply with:
    1. chapter 2 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017
    2. section 2 of the General Code of Conduct (“GCC”)
    3. all other requirements in the GCC excluding section 13.

The exemption is also subject to the condition that the relevant applicant must provide the FSCA with any information it requests that is in the possession of, or under the control of, the applicant, that is relevant to the financial services and/or similar activities rendered by such applicant. This application must be made by persons seeking an exemption by 1 December 2023. This exemption excludes persons categorised as crypto asset miners, node operators, and financial services in relation to non-fungible tokens, in respect of whom it is already deemed to apply.

As can be seen from the breadth of the legislative framework underpinning ‘financial products’ under FAIS, the consequences of the Declaration will be far reaching, and will impact many businesses in South Africa dealing in crypto assets. When the draft of the Declaration was published in November 2020, it was noted that the intention behind the Declaration was to capture intermediaries that advise on or sell crypto assets to consumers, so as to provide adequate protection for consumers who are advised to purchase these products. Businesses in this space that have until now been operating in a largely unregulated environment will need to move quickly to become compliant.

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The New York Stock Exchange and The Johannesburg Stock Exchange Announce Collaboration on Dual Listings


NEW YORK & JOHANNESBURG, 10 October 2022 — The New York Stock Exchange, part of Intercontinental Exchange, Inc. (NYSE: ICE), and the Johannesburg Stock Exchange (JSE) today announced that they have signed a memorandum of understanding to collaborate on the dual listing of companies on both exchanges.

The NYSE and the JSE also agreed to jointly explore the development of new products and share knowledge around ESG, ETFs and digital assets.

The agreement was finalized during a visit to the NYSE by a South African delegation including JSE Group CEO Dr. Leila Fourie and South African Reserve Bank Governor Lesetja Kganyago. The signing ceremony took place shortly before the delegation rang the Closing Bell, followed by a keynote address by Kganyago on monetary policy.

“The New York Stock Exchange is pleased to sign this collaboration agreement with the Johannesburg Stock Exchange in support of the important economic and trade relationship between our two markets,” said Lynn Martin, NYSE President. “Exploring the dual listings of companies on our two exchanges stands to increase opportunities for investors on both continents, underscoring the value public companies and our capital markets generate in the global economy. We look forward to collaborating on new product development with the JSE team and to the innovation that comes when two great organizations work together.”

“The agreement that we have signed today with the NYSE will unlock opportunities for investors and issuers of both bourses,” said Dr. Fourie. “This is the beginning of a new chapter and I am excited about the opportunities we will explore together as we find synergies to grow both our markets. For the JSE, as the largest stock exchange on the African continent with unparalleled market depth and liquidity, we aim to create world-class solutions for both local and international investors.”

The United States ranks as one of South Africa’s largest trading partners and this agreement is designed to help support the economic relationship between the two nations. Today, about 600 U.S. companies operate in South Africa in sectors including manufacturing, technology, finance, insurance and wholesale trade.

About NYSE Group

NYSE Group is a subsidiary of Intercontinental Exchange (NYSE: ICE), a leading global provider of data, technology and market infrastructure. NYSE Group’s equity exchanges — the New York Stock Exchange, NYSE American, NYSE Arca, NYSE Chicago and NYSE National — trade more U.S. equity volume than any other exchange group. The NYSE, an ICE exchange, is the premier global venue for capital raising. NYSE Arca Options and NYSE Amex Options are leading equity options exchanges. To learn more, visit

About Intercontinental Exchange

Intercontinental Exchange, Inc. (NYSE: ICE) is a Fortune 500 company that designs, builds and operates digital networks to connect people to opportunity. We provide financial technology and data services across major asset classes that offer our customers access to mission-critical workflow tools that increase transparency and operational efficiencies. We operate exchanges, including the New York Stock Exchange, and clearing houses that help people invest, raise capital and manage risk across multiple asset classes. Our comprehensive fixed income data services and execution capabilities provide information, analytics and platforms that help our customers capitalize on opportunities and operate more efficiently. At ICE Mortgage Technology, we are transforming and digitizing the U.S. residential mortgage process, from consumer engagement through loan registration. Together, we transform, streamline and automate industries to connect our customers to opportunity.

Trademarks of ICE and/or its affiliates include Intercontinental Exchange, ICE, ICE block design, NYSE and New York Stock Exchange. Information regarding additional trademarks and intellectual property rights of Intercontinental Exchange, Inc. and/or its affiliates is located here. Key Information Documents for certain products covered by the EU Packaged Retail and Insurance-based Investment Products Regulation can be accessed on the relevant exchange website under the heading “Key Information Documents (KIDS).”

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 — Statements in this press release regarding ICE’s business that are not historical facts are “forward-looking statements” that involve risks and uncertainties. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see ICE’s Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in ICE’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 3, 2022.

About the JSE

The Johannesburg Stock Exchange (JSE) has a well-established history of operating as a marketplace for trading financial products. It is a pioneering, globally-connected exchange group that enables inclusive economic growth through trusted, world-class, socially responsible products, and services for the investor of the future. It offers secure and efficient primary and secondary capital markets across a diverse range of securities, spanning equities, derivatives, and debt markets. It prides itself on being the market of choice for local and international investors looking to gain exposure to leading capital markets on the African continent. The JSE is currently ranked in the Top 20 largest stock exchanges in the world by market capitalisation, and is the largest stock exchange in Africa, having been in operation for 130 years. As a leading global exchange, the JSE co-creates, unlocks value & makes real connections happen. 

NYSE Media Contact:

Bridget Walsh

(212) 656-2298

ICE Investor Contact:

Katia Gonzalez

(678) 981-3882

JSE General Enquiries:


011 520 7000

JSE Media Contact:

Paballo Makhetha

Communication Specialist

011 520 7331

066 261 7405 (mobile)

BCBS-CPMI-IOSCO finalise analysis of margining practices during the March 2020 market turmoil

  • Global standard setters publish a report on margin practices, highlighting the need for further policy work.
  • The report presents a data-driven analysis examining margin calls in March and April 2020 and the extent to which market participants were prepared to meet them.
  • The report recommends further policy work in six areas.

The Basel Committee on Banking Supervision (BCBS), the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) (the standard setters) today published the report Review of margining practices.

The report feeds into the Financial Stability Board’s work programme to enhance the resilience of the non-bank financial intermediation sector. It looks at margin calls during the high market volatility and “dash for cash” in March and April 2020. It also reviews margin practices transparency, predictability and volatility across various jurisdictions and markets, as well as market participants’ preparedness to meet margin calls.

The report builds on the consultative report Review of margining practices published in October 2021, which in particular was based on surveys of central counterparties (CCPs), clearing members and broker-dealers, clients (ie entities that participate in these markets through an intermediary) and regulatory authorities, and other data analyses. It takes into account the feedback received on the consultative report, including through a series of stakeholders outreach events, confirming that:

  • Variation margin calls in both centrally and non-centrally cleared markets in March were large, and significantly higher than in February 2020. The peak CCP variation margin call was $140 billion on 9 March 2020.
  • Initial margin requirements for centrally cleared markets increased by roughly $300 billion over March 2020, and varied substantially across, and within, asset classes.
  • Initial margin requirements on non-centrally cleared derivatives remained relatively stable during the stress period.

A summary of the feedback received has been published alongside the report.

On the back of the analysis, and taking into account feedback from industry, the report confirms six areas for further policy work on:

  • Increasing transparency in centrally cleared markets.
  • Enhancing the liquidity preparedness of market participants as well as liquidity disclosures.
  • Identifying data gaps in regulatory reporting.
  • Streamlining variation margin processes in centrally and non-centrally cleared markets.
  • Evaluating the responsiveness of centrally cleared initial margin models to market stresses, with a focus on impacts and implications for CCP resources and the wider financial system.
  • Evaluating the responsiveness of non-centrally cleared initial margin models to market stresses.

Notes to editors:

Margin is collateral and funds that are collected to protect against future or current risk exposures resulting from market price changes or in the event of a counterparty default.

KPMG Insurance Survey 2022: The insurance industry sees strong growth despite tough market conditions


21 September 2022; KPMG South Africa today launched its annual South African Insurance Industry Survey for 2022. 34 non-life insurers, 19 life insurers and four reinsurers were surveyed. The results indicate that while the reinsurance market in South Africa has had a rough ride, the overall insurance industry has had a better-than-expected year – with strong gains in both the life and non-life sectors. However, there are some very real risks that face the sector over the next year and looking forward, including economic volatility, ever increasing evidence of climate change, a much-needed focus on ESG reporting, support and understanding as well as understanding how to navigate South Africa’s social cohesion challenges.

“It is great to see in this year’s survey that the non-life and life insurers have bounced back nicely after the pandemic and have shown strong recovery at the top and bottom lines – creating a strong base from which the industry is able to enter what seems to be the end of the pandemic,” says Mark Danckwerts, Partner: KPMG Africa insurance practice leader.

Non-life insurance industry

Following the significant volumes and values of business interruption claims in 2020 because of the Covid-19 pandemic, the non-life insurance industry presented robust 2021 results, with the sector increasing profits by more than double the 2020 figures to R12.1 billion.

The industry reported gross written premiums (GWP) of R131.6 billion, an increase of 7% from the prior year. The ten largest non-life insurers, when measured on GWP, have a market share of 76.5%. There were marginal shifts in this space with Escap moving into the top ten, Centriq Insurance Company Limited moving down to the tenth position and Mutual and Federal Risk Financing Limited moving out of the top ten into eleventh position.

GWP growth for the sector exceeded headline CPI of 5.9%, with five insurers outperforming the GWP growth rate of 7%; these are Escap SOC Limited (Escap), Guardrisk Insurance Company Limited (Guardrisk), Discovery Insure Limited (Discovery), Bryte Insurance Company Limited (Bryte) and Lombard Insurance Company Limited (Lombard). Growth came from diversifying client bases and improved new business volumes. In this period Discovery Insure reported its lowest lapse rate since inception; 2% lower than the previous year.

The sector has shown incredible resilience by getting back to pre-pandemic results, with profit after tax increasing by 110% from R5.6 billion to R11.7 billion, largely as a result of a decreased industry loss ratio of 57% (61% in 2020).

“While the non-life industry has had a strong year – the pressure is on to remain resilient. Increasing crime, weather-related catastrophe events, the continued erosion of social cohesion in South Africa, and supply chain and power supply disruptions, all paint a picture that will require tenacity, skill and an increased focus on loss-preventing technology,” says Danckwerts.

Life insurance industry results

“While life insurers faced another turbulent year, the industry experienced improvements in the volume and profitability of new business and welcomed a positive lapse experience and better equity and bond market performance. The industry demonstrated its resilience once again and was able to remain well capitalised to meet policyholder obligations,” says Danckwerts.

In 2020, several life insurers reported having paid or accrued for more claims than ever before, resulting in an overall loss of R5 billion. The life insurance industry has done well to return to profitability in 2021, reporting healthy profits of R17.1 billion. ASISA reported a 17% increase in new individual recurring premium risk policies and a reduction of 28.8% in lapsed policies.

“It is important to note however, that for many life insurers’ results have not yet returned to pre-pandemic levels and these insurers would need to refocus efforts on other drivers of profitability such as digital innovation, cost optimisation and pricing reviews,” says Danckwerts.

Reinsurance industry results

While the primary insurance industry was sufficiently protected by the reinsurance industry through the robust reinsurance structures and arrangements in place, there is no doubt that the reinsurance industry bore the brunt of the loss events that occurred during 2020 and 2021. With GWP growth of only 1%, an 11% decline in investment income and underwriting losses from all surveyed reinsurers (R3.8 billion), it is safe to say that the reinsurers did not recover well following Covid-19 related business interruption claims from non-life insurers and increased mortality experience by life insurers.

“The reality is that while reinsurers writing life insurance risks were hit much harder than non-life insurance risks, it was a tough year all round for both. Consequently, we have seen the hardening of reinsurance rates in 2022.”

“This year’s survey has shown us once again how the insurance sector has, at large, shown resilience in the face of adversity – a trend that has continued after our previous survey. However, to remain agile, insurers are going to have to consider the role they play in mitigating risk, in dealing with risk brought about by changing technology, social patterns and economic turbulence and in finding ways to innovate further to meet the unique challenges that the South African landscape presents,” concludes Danckwerts.

South Africa: The unintended consequences of Most Favoured Nation Clauses in Tax treaties

By Francis Mayebe, Candidate Attorney, overseen by Virusha Subban, Partner and Head of Tax, Baker McKenzie Johannesburg


Bilateral tax treaties are mainly based on the principle of reciprocity. Under this principle, one state negotiates better treaty terms with another in exchange for making a particular concession. As is clearly seen in most protocols, the Most Favoured Nation (MFN) clause is usually included as a concession by a developing state looking to renegotiate particular treaty provisions. An illustration of this can be seen in the inclusion of the MFN clause in South Africa’s protocols with the Netherlands and Sweden, as it was negotiating to include withholding tax on dividends.

The broad rationale behind MFN clauses stems from the field of foreign direct investment. Throughout history, the MFN clause has seldom been accepted as a principle to be included in tax treaties. It is indisputable that the MFN clause comes with some benefits, however, its downfalls are significant. The most significant of these being that the clause creates various opportunities for the reduction of source taxation and that it exposes the source states, which are usually developing countries, to large-scale base erosion of taxes. To illustrate this, we analyse two court cases involving the Netherlands, South Africa and India.

A judicial perspective

In ABC (PTY) ltd v C: SARS 2019, the taxpayer sought to receive beneficial treatment from the South African and Kuwait Double Taxation Agreement (DTA), which provided an exemption from the dividends withholding tax. The basis for this claim had come about through a technical flaw in the wording between Sweden and South Africa’s DTA, which omitted the words “after the date of this convention”. As a result of this wording, treaty benefits afforded to another State by South Africa that are more favourable than those in the DTA with Sweden triggered the MFN clause. In effect, the exemption to withholding tax on dividends in the Kuwait DTA would automatically apply to the Swedish DTA. 

The ripple effect of this clause is that all other States with an MFN clause, like the Netherlands in this instance, could claim the same exemption afforded in South Africa and Sweden’s DTA.

It is on this basis that the taxpayer argued that the exemption of withholding tax on dividends should apply to Dutch residents, by virtue of the MFN clause, in their tax treatment with South Africa.

The tax court found in favour of the taxpayer and instructed the South African tax authorities to provide refunds to all withheld dividend taxes to Dutch residents. Therefore, the technical or unforeseen error in the MFN clause between South Africa and Sweden resulted in a huge fiscal loss of revenue for South Africa. This case clearly demonstrates the dangers of unintended consequences that come with the inclusion of the MFN clause in tax treaties.

In the case of Concentrix Services Netherlands BV WP and Optum Global Solutions International BV WP (C) the court again found in favour of the taxpayer, who was a Netherlands tax resident. This resulted in the application of a lower withholding tax of 5%, as was applied in India and Slovenia Double Taxation Avoidance Agreement (DTAA), based on the MFN clause contained in the Indian and Netherlands DTAA.

A turning point, in this case, was a condition that required the third state to be an Organization for Economic Cooperation and Development (OECD) member before or at the time the DTAA was signed between the third state and India. However, the court held a contrary view, to the effect that the condition would only be fulfilled at the time the MFN benefit was claimed and not after the treaty. This interpretation, in our view, goes beyond the scope of the ambits of the MFN clause and its intended purpose when the tax authorities included it. This largely broad interpretation violates the principle of good faith as enshrined in the Vienna Convention on the Law of Treaties (VCLT).

This case demonstrates a clear downfall of the MFN clause in that it may result in unintended consequences due to the uncertainty posed by its interpretation, particularly in the judiciary. 

Practical comments

As can be deduced from the above discussion, the MFN clause infringes on the fundamental principle of the “Pacta sunt servanda” as enshrined in Article 26 of the VCLT. It infringes this principle by altering treaty provisions that are decided upon and conceded bilaterally by states during treaty negotiation by invoking future benefits or treaty terms that go beyond the original terms agreed upon by the states in their DTA.

These unforeseeable future treaty benefits have serious repercussions for states that would not gain from the invoked benefits. As already seen after the ABC v SARS decision, the MFN clause significantly increased investment flow through South Africa and the Netherlands due to the zero-rated withholding tax on dividends, thus increasing treaty shopping and significantly reducing South Africa’s collectible tax revenue on the declared foreign dividends.

Therefore, states negotiating or renegotiating their DTAs, including the MFN clause, should exercise caution when drafting the clause, and undertake a rigorous assessment of its impact on their tax treaties within their network prior to ratifying it.

Including direct shares in your retirement annuity

By Schalk Louw, portfolio manager at PSG Wealth

Is it possible to structure your RA in such a way that you can invest in direct shares? The answer is yes, but unfortunately most people don’t know this.

A Personal Share Portfolio (PSP) allows you to tailor your own bespoke share portfolio as part of your retirement investment strategy. Most RA platforms in South Africa now offer the solution for a portfolio manager to choose a selection of local and international shares, which, as a direct share portfolio, can be included in your retirement annuity investment and be actively managed. This solution offers quite a few advantages, including: 

Tax advantages

No capital gains tax or income tax is payable within a retirement annuity, so you can have exposure to direct shares within your RA, without the usual tax implications attached to a separate direct equity portfolio (which does not form part of your RA). 

Personal attention

Unlike most asset management companies, many stockbroking companies offer you direct access to portfolio managers.


The current average total expense ratio for general equity unit trusts amounts to 1.56% per year with additional performance fees attached to many of these funds. In most cases, personal share portfolio management fees start from 1.15% (incl. VAT), which can be reduced on a sliding scale based on the value of your portfolio, with no performance fee charges. These fees will vary from provider and provider, and you need to negotiate the fees with your portfolio manager, so be sure to do some homework before you commit. Also bear in mind that a certain minimum portfolio size should be reached before it becomes viable and suitably diversified.

Estate planning

RAs hold many advantages for estate planning, including a potential 3.5% saving in executor’s fees. 

One of the main advantages of an RA that is also invested in direct shares is probably the fact that you have more control over your investment composition. The reason for this is that any RA is subject to Regulation 28 of the Pension Funds Act. According to Regulation 28, there are certain restrictions in terms of the weights you are allowed to allocate to different asset classes within an RA. 

Based on historical data, it is a well-known fact that shares held within an RA certainly offer the best long-term growth potential. For a young investor looking to invest directly in shares, the problem is two-fold. Firstly, Regulation 28 restricts the investment in direct shares (both locally and offshore) within a RA to 75%. 

Another problem is that if you choose to invest in equity-based unit trust funds, you should know that very few of these funds can actually invest 100% of the fund in direct shares, simply because of cost recovery and the fact that it has to have the capacity for withdrawals to be made.

By including an extra layer of unit trusts in your RA, the possibility of you reaching that 75% is unlikely. By investing directly in shares, however, you have more control, which means that you can reach your 75% target. 

The good news is that this option is now available to most investors, which can definitely give your RA a huge boost in terms of performance. 

Lessons from an unexpected contender in the Rand’s battle against ongoing currency weakness

By Bastian Teichgreeber, Chief Investment Officer at Prescient Investment Management

South Africa’s rand has had an exceptionally volatile year, almost reaching R20 to the dollar in May before strengthening to about R17.27 in late July and then weakening again to trade between R18 and about R19.30 to date.  Most notable about the domestic currency’s weakness is that it has been weak on a relative basis compared with some of the other emerging market currencies and not just against the US dollar, which suggests that there are other forces at work.

Over the past two years, South Africa has not only weakened against the dollar, but it has come up against an unexpected contender: Mexico. The Mexican peso has performed much better than the SA rand against the dollar since mid-2022, when the peso decoupled from our exchange rate after closely tracking it for years. The chart below, which compares the performance of the two currencies relative to the dollar, shows the peso has strengthened over the period while the rand has weakened.

South African rand vs. Mexican peso: normalised returns:

Source: Prescient Investment Management, Bloomberg (as at 18 October 2023)

So where has the rand’s weakness stemmed from? The emerging markets, of which South Africa is one, are often viewed as a collective by foreign investors. Though diverse, these countries are generally considered to offer the prospective of relatively higher returns based on their faster economic growth rates and more favourable demographics than advanced economies that are aging fast.

Thus, investors willing to take on the higher risks associated with emerging markets stand to benefit from the opportunities they offer. Their fixed interest yields ordinarily compensate investors for their risk by trading at a premium to developed market yields, particularly to US Treasuries, which are viewed as safe havens. Stock markets, like South Africa’s JSE currently trades at a discount, with the US stock market currently trading above its long-term average after an extended bull market.

Emerging market financial markets and foreign exchange rates usually benefit during periods when investors have an increased appetite for risk, resulting in a weaker dollar when money flows out of the US and into emerging market assets, and lose ground when investors become risk averse and money flows back into the US, buoying the dollar.

Notwithstanding these opportunities, the US Federal Reserve’s proactive stance on interest rates, outpacing counterparts like the Bank of England and the European Central Bank, saw the US dollar gain significant ground over the past two years, fortifying its position as the strongest currency globally. It has also confounded expectations that it will weaken this year in anticipation of the US’s long-awaited recession. High interest rates have been expected to take their toll on the world’s largest economy, but the economy has proved much more robust then envisaged.

Emerging market currencies, like the rand, typically face headwinds in the wake of a robust dollar. Yet exceptions to this trend exist. Notably, the Mexican peso has been remarkably and unusually resilient against the dollar. South Africans can glean invaluable insights from Mexico’s experience, which can be attributed to the country’s favorable economic conditions and inflation dynamics, but most importantly prudent central bank policies.

The peso has benefited from the Bank of Mexico raising rates in line with rising inflation. While the South African Reserve Bank (SARB) responded swiftly to the threat of inflation too, its approach has been more measured and this nuanced distinction has played a pivotal role in the divergence in the performance of the rand relative to the peso against the USD.

South African CPI vs. 3m swap:

Sources: Prescient Investment Management, Bloomberg (as at 30 September 2023)

 Mexican CPI vs 3m swap:

Sources: Prescient Investment Management, Bloomberg (as at 30 September 2023)

It is crucial to recognize that currencies are inherently relative, reflecting disparities in economic fundamentals, inflation projections, central bank strategies, and interest rates between the countries against which they are measured. Exchange rates thus serve as the barometer of a nation’s relative economic vitality on the global stage.

Real interest rates matter most in foreign exchange markets and explain why the Mexican peso parted ways with the SA rand last year. In 2022, the Bank of Mexico swiftly returned to positive real rates while the South African Reserve Bank allowed our currency to experience negative real rates at the front end of the curve for a slightly longer period.

Today, however, South Africa enjoys elevated real interest rates and inflation appears largely under control, bolstered by a central bank that remains steadfast in its fight against inflation. However, are rand remains starkly undervalued and most of our asset classes are trading at a discount globally.

To unlock SA’s exchange rate and foreign investment potential and return SA to favour with foreign investors, its paramount that government moves ahead with its structural reforms, facilitates robust infrastructure development and secures political stability. Addressing these crucial factors could set the stage for the rand to strengthen against the dollar to a point where it is fairly valued again, regaining its rightful place alongside other emerging markets, like Mexico.

In early November, the rand benefited from the US Fed’s decision to keep interest rates at current level and the subsequent weakening in the dollar. It also managed to withstand the disappointing news in the mid-year Budget that the budget deficit is going to be much higher than targeted, undermining National Treasury’s fiscal consolidation efforts. Disappointment on the fiscal front will need to be counterbalanced by progress on the other fronts if SA has any hope of regaining its lost ground against the dollar and recoupling with Mexico’s peso anytime soon.

The pros and cons of using SARB gold and foreign exchange contingency reserves to avoid fiscal measures

Daniel Makina, University of South Africa

In October this year, a group of one hundred economists and nongovernmental organisations led by the Institute for Economic Justice (IEJ) wrote a letter to the President urging him to consider using gold and foreign exchange contingency reserves to avoid fiscal austerity measures. The idea is reminiscent of the concluding pages of the seminal book – General Theory of Employment, Interest and Money – in which John Maynard Keynes wrote that ideas “are more powerful than is commonly understood. Indeed, the world is ruled by little else. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. … But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” Recently, the Financial Times reported that Amia Capital, a London-based hedge fund has joined the fray in calling for President Cyril Ramaphosa to consider using the reserves to ease fiscal pressure. Indeed, the idea of using gold and foreign exchange contingency reserves is gaining currency as National Treasury and the SARB are in discussion to explore the possibility in the face of the fiscal crisis. As at the end of March 2023 these contingency reserves held by the SARB amounted to R459 billion, about the size of Eskom total debt.

Gold and foreign exchange contingency reserves are assets held by the South African Reserve Bank (SARB) to ensure stability in financial markets and meet any unexpected economic challenges. They consist of gold reserves (a form of insurance against currency fluctuations and economic uncertainties) and foreign exchange reserves which can be used to intervene in currency markets to influence the exchange rate or to pay off international debts. In essence, these reserves act as a buffer so that the state can respond to economic challenges such as currency crises, and sudden capital outflows.

On the positives, the SARB gold and foreign exchange contingency reserves can be used to alleviate fiscal imbalances in various ways. First, if a country experiences persistent trade deficits, the reserves can be used to address the imbalance either to stabilize the currency or to directly fund imports. South Africa does not face this problem although there is some noticeable worsening of the balance of payments, albeit not outside acceptable limits. Second, when country experiences problems in honouring its external debts, it can use its foreign exchange reserves to prevent default on foreign loans. Again, South Africa is not in a situation where it is about to default on its foreign debt. Its problem is significant share of domestic debt denominated in rand, which theoretically it can solve by printing money. Third, when a country is experiencing volatile currency fluctuations, the central bank can intervene using reserves to stabilize the currency. This usually happens when a country has a managed exchange rate regime. However, South Africa operates a flexible exchange rate regime which self-corrects. Fourth, the reserves could be utilized for short-term fiscal relief, that is providing a quick injection of funds to cover budget shortfalls, and thus assisting the government meet its immediate financial obligations. To a large extent South Africa has been having budget deficits since 2013 which are getting worse. In the current fiscal year the budget deficit is expected to be 4.9% of GDP which is well above the allowable 3%. The question is whether using foreign exchange reserves can provide short-term relief to a problem that has become structural. That brings us to cons of using foreign exchange reserves.

The first negative is that using foreign exchange reserves to inject funds in the economy can cause inflationary pressures. This arises because foreign currency needs to be sold for domestic currency which acts to increase money supply which in turn causes a rise in inflation. This is why the SARB is concerned with the liquidity management cost if reserves are utilized in this manner.

The second negative is that holding foreign exchange reserves involves an opportunity cost since the funds could be invested for potential good returns. This opportunity cost needs to be calculated and weighed by National Treasury and SARB before using reserves to fund government expenditure. If the reserves are invested in interest-bearing assets, using them means foregoing potential earnings. This could result in additional costs for the government if it needs to borrow more or if it loses out on income from the investment of those reserves.

The third negative is that depleting reserves means reduced cushion for future shocks because they act as a safety net and using them to plug fiscal gaps leaves the country more vulnerable to future economic challenges. In this case, it is better to address underlying fiscal issues.

The fourth negative is use of foreign exchange reserves can affect market and investor confidence. Investors often view robust reserves as a sign of a country’s economic strength and ability to weather uncertainties. Prudent management is crucial to maintain trust in the stability of a country’s financial system. A significant reduction of reserves may raise concerns about the country’s macroeconomic stability.

The fifth negative is that using reserves to address fiscal imbalances might postpone the need for necessary long overdue structural reforms in public finances. This will in turn exacerbate long-term fiscal sustainability challenges which South Africa is facing.

In conclusion, fiscal and monetary authorities should be aware that whilst using reserves can provide short-term fiscal relief, it is imperative to carefully weigh the short-term benefits against the potential long-term fiscal risks that could erode investors’ confidence, and ultimately lead to significant increases in borrowing costs and potentially to debt distress. To ensure sustained macroeconomic health of the country it is advisable to take a balanced approach, considering alternative fiscal measures and reforms.

South Africa is grappling with the public-private partnership versus the privatization decision

Daniel Makina, University of South Africa

Disclaimer: This article expresses the personal views of the author and not specifically those of SAIFM.  SAIFM encourages members with alternate views to please submit the same.  SAIFM encourages discussion and debate in the financial markets.

Market economies are underpinned by the free-market theory popularized by Adam Smith, an 18th-century Scottish economist who is best known for his seminal work, “The Wealth of Nations,” published in 1776. In the book he outlined the principles of a free-market economy, emphasizing the importance of self-interest, competition, and the invisible hand – the idea that individuals pursuing their own interests can unintentionally contribute to the well-being of society via the market mechanism. In essence, free market theory is an economic philosophy that advocates limited or minimal government intervention in economic activities, meaning that markets should operate with little to no regulation or government interference.

Notwithstanding the advantages of the free market theory, some critics argue that it can lead to market failures, income inequality and other social and economic issues. As a result, real-world economies are mixed economies that incorporate elements of both free markets and government regulation to advance economic growth and development.

The case for government intervention

Government intervention in the economy is often justified by various arguments. These include, among others, the need to address market failure, to provide public goods and services, to address income inequality, to protect consumers, to protect the environment, and to provide public health and education. These arguments highlight the role of government in addressing market failures, promoting public welfare, and maintaining social and economic stability and stimulating economic growth and development. In recent times, no one has done a better job of combining government intervention and market forces than the “developmental” states of East Asia. Japan, South Korea, Taiwan, and, most spectacularly, China. They have all relied on a mix of policies that both encourage market forces and government intervention in selectively key sectors. Each shaped its own economic future through a wide range of industrial policies – directed credit, subsidies, tariff and non-tariff barriers, and local-content and other requirements for foreign investors – that helped it develop new areas of economic competence. These polices resulted in economic growth that lifted hundreds of millions of people from abject poverty, and elevated some of them to the status of advanced economies in less than two generations.

Privatization versus public-private partnerships

At some point, governments that take on activities beyond those required to address market failures and externalities, become riddled with corruption and widespread inefficiencies. In desperation to save the situation, they consider involving the private sector, either through privatization of inefficient state-owned enterprises (SOEs) or through public-private partnerships (PPPs). Privatization involves the transfer of ownership and control to the private sector, while PPPs maintain public ownership and seek a collaborative approach with the private sector in some activities, including infrastructure development and service delivery. The choice between these approaches depends on the specific objectives of the government.

In essence, privatization and public-private partnerships (PPPs) are distinct approaches to involving the private sector. However, there are key differences between the two. Firstly, in privatization the government transfers ownership and control of a public asset or service to the private sector. The private entity becomes the sole owner and operator. Whereas, in a PPP the public sector retains ownership of the asset or service, while partnering with the private sector for its operation. Secondly, the primary objective of privatization is often to reduce government expenditure and improve efficiency. On the other hand, PPPs aim to leverage private sector expertise and resources while maintaining public sector influence to achieve specific public policy objectives. Thirdly, in privatization most risks are transferred to the private entity, which now would bear the responsibility for performance, financial, and operational risks whereas in PPPs risks are shared between the public and private sectors. This sharing of risk encourages collaboration and helps manage uncertainty. Fourthly, in privatization services are delivered solely by the private sector, with the goal of maximizing profit whereas in PPPs, services can be delivered by both public and private entities working together. And emphasis is achieving a balance between public and private interests.

South Africa’s weird circumstances

The economy of South Africa is mixed, and the government sector includes state-owned enterprises (SOEs) that are a large component of the economy. SOEs are a product of the ideological orientation of the governing party which is guided by the Freedom Charter adopted in 1955 by the Congress of the People which sought to nationalize what it considered to be strategic sectors -the mining industry, the banks, and the leading monopolies. Over the years the Freedom Charter became the guiding tool for the National Democratic Revolution (NDR) spearheaded by the Tripartite Alliance comprising the ANC, the SACP and COSATU whose aim is to control the strategic sectors of the economy via policies of cadre development, preferential procurement, among others.

Unfortunately, the policies adopted for spearheading the NDR were not entirely based on merit. As a result, they produced unintended results such as mismanagement, inefficiencies, and corruption in state entities. An American management consultant, Ed Ryan, provides some useful insights into why organizations, both public and private, fail to build a team of capable management. He says: “The reason why so few companies [or organizations] succeed in building a true ‘Dream Team’ is this: it’s been said that talent goes downhill. By that I mean, if you are a ten, you will hire a nine. The nine who is working for you will hire an eight. The eight hires a seven and down it goes. Inferior people work for superior people. But, for any company [or organization] to grow, it must be full of tens — people who are best at what they do in their area of expertise.”

Apparently, Ed Ryan’s observation aptly summarizes how the SOEs are staffed. First, the government itself that appoints chief executives of these enterprises is nowhere near being a ten. Because its decisions are crowded by political considerations, it is on the lower end of the talent hill. Suppose that by chance the government picks the right and ideal chief executive, something it occasionally does. The second problem is that the appointed chief executive is not given a chance to hire a nine to work under him/her either. All staff positions are filled up for him/her with people selected through a process riddled with political patronage, chicanery, nepotism, kickbacks and so forth. The criterion of picking those that are best at what they do in their area of expertise is rarely applied, save by accident.

Hence, problems at SOEs have been attributed to corruption and mismanagement by senior management in cahoots with political elites and gullible private actors. The government’s response had been to suspend senior management pending investigations and prosecution. In fact, there is a discernible pattern of events in state enterprises. The government, amidst pomp and fanfare, appoints chief executives with generally good credentials to run these enterprises. However, after a short period in office, on average two to three years, allegations of corruption and mismanagement emerge. The government responds by suspending senior management pending investigations and prosecution. Senior management contests the allegations in the courts. The investigations and the legal process drag on for several months or even years. Eventually, the suspended senior management are given golden handshakes as retrenchment packages. New senior management is appointed, and the process starts all over again. The result is that you never get a dream team to run an SOE or even just a semblance of it, but only something akin to a pyramid scheme. Hence there is generally management paralysis in most SOEs because the pyramid scheme has now reached unsustainable levels.

South Africa is experiencing state failure rather than market failure

Because of ill-conceived policies not grounded on merit, the state is now experiencing state failure to the extent that the private sector is intervening to save the state. This is a weird situation. The orthodox approach is for the state to intervene in private markets to prevent market failure as what happened during the Global Financial Crisis (2008 -2009) and the COVID-19 pandemic (2020 -2022).

Apparently, South African business justifies its intervention based on evidence and argues that they  have a responsibility to the country’s citizens to help. It refers to recent data from the Edelman Trust Barometer that found that 62% of South Africans trusted business more than the government. Furthermore, a recent Stats SA report, the 2022/23 Governance, Public Safety And Justice Survey, showed that citizens are using fewer government services now than they did in 2019/20. It found that, due to corruption, maladministration, and a lack of trust, they are requesting the private sector to perform services previously offered by the government.

The folly of delaying privatization

Despite privatization of inefficient SOEs in South Africa being ideologically considered taboo, eventually, it will be driven by push factors. The delay in embracing it will only serve to exacerbate SOEs being a very big fiscal burden, an albatross around the government’s neck. The burden manifests itself in poor, obsolete, and inefficient infrastructure. Eskom and Transnet are evident cases. Because they have borrowed heavily on the back of government guarantees, their creditworthiness is very low and so they cannot access cheap finance anymore and now survive on government bailouts. Because the government itself is struggling to meet its own obligations, it cannot help. At the same time, it does not want privatize the inefficient SOEs because of ideological reasons.

The folly of delaying privatization of inefficient SOEs is best exemplified by the experience of Zambia. The delayed privatization of Zambian copper mines provides a painful lesson that South Africa should learn from. By the time the Zambian government allowed the privatization to fully go through, the copper mines were in such a dilapidated state and insolvent that they fetched very little for the fiscus.

Recommendations for the way forward

The Government should come up with a coherent reform strategy for SOEs and the envisaged private sector involvement. The reform strategy should identify those SOEs that the state can retain control, those that should be privatized, and those which it can partner with the private sector in a public-private partnership arrangement. The present muddling along whereby the private sector is intervening to avert state failure is unsustainable.  In its dealing with the private sector, the government should take its cue from the late American economist Milton Friedman who aptly stated: “There is one and only social responsibility of business – to use its resources and to engage in activities designed to increase its profits as long as it stays within the rules of the game.” The rules of the game meant here are the external constraints imposed on managers by governments and society. The Government won’t go wrong if it embraces this cardinal principle.

Given that the Government is generally averse to privatization but amenable to PPPs, it is advised to note that the private sector would not want to share the burden of debts accumulated by SOEs. The private sector can only participate in PPPs not burdened by debt. Even one of the SOEs, the DBSA is indicating that it can only lend to Transnet when revenue streams are ring-fenced so that it can have its loans repaid.

Presently, PPPs are not working as desired. The largely insolvent Transnet’s experience is testimony to this as it is struggling to attract private sector participation. For PPPs to be successful, there are several conditions that must be satisfied. Firstly, well-defined goals and objectives are crucial for a successful PPP and not the ad hoc approach currently in place. Secondly, there should be a strong legal and regulatory framework to ensure accountability and dispute resolution. Thirdly, there should be an effective risk-sharing mechanism and allocation system between public and private entities. Presently, there is none and hence the failure of the few that has been tried, especially with Transnet. Fourthly, the government should recognize that the private sector will only be interested in projects that are financially viable. Fifthly, a competent governance structure and oversight mechanisms should be put in place for every PPP.

In conclusion South Africa is advised to come up with a comprehensive home-grown reform strategy of its SOEs. East Asian developmentalism offers an important lesson for South Africa. If dirigisme in South Africa focuses on creating a strong, inclusive domestic economy, it will do much good to address the country’s development challenges of high inequality, poverty and unemployment. Otherwise, it will do much harm to the rest of the economy and worsen the country’s development challenges.  

Higher for longer, but no more hikes

Kim Silberman, Economist and Macro Strategist, Matrix Fund Managers

Lesetja Kganyago, Governor of the SA Reserve Bank (SARB), was exceptionally dovish at today’s (23 November 2023) Monetary Policy Committee (MPC) meeting, especially relative to his usual stance and relative to October’s CPI which came in at 5.9% year-on-year (y/y) relative to expectations of 5.6%.

While this could have provided a platform for the MPC to centre the discussion on the fight against inflation, the speech focused instead on the fact that while risks to inflation were substantial, monetary policy is restrictive, wage inflation is lower and the MPC will look through temporary price shocks and focus on second round effects – or core inflation. This is important given that the surprise to inflation is very much about first round effects and very product-specific price pressures, for example potato prices rose 64% y/y and eggs 24% y/y. These do not warrant a hike in interest rates. The meeting concluded that, barring any big shocks to core inflation, the SARB is comfortable with rates at 8.25%.

Interest rates are deemed sufficiently restrictive at present to guide inflation back to 4.5%. We expect that the SARB will start to cut rates in line with the US Federal Reserve Bank (Fed), in the first half of 2024. We doubt cuts will materialise ahead of the Fed, as this may negatively impact the value of the USD/ZAR. The governor explained that SA is forced to keep rates restrictive because of sovereign risks emanating from high levels of public debt, energy supply issues, high administrative prices and public sector wage inflation which is not in line with productivity. If these factors were resolved, rates could be structurally lower relative to inflation.

The governor provided useful insights into the GFECRA (Gold and Foreign Exchange Contingency Reserve Account). Profits on gold and foreign exchange reserves can be utilised by National Treasury either by selling the reserves or by keeping the reserves and printing money. It’s not often that a central banker utters the words “printing money” as a realistic option. In the event that the SARB prints money equating to a portion of the profits of SA’s gold and foreign exchange reserves, this would need to be sterilised, or drained from circulation. This would mean the SARB would pay interest at the repo rate.

The risk highlighted by the governor was that it would need to recoup that interest from National Treasury, which is already cash strapped. Consequently, the SARB is working with Treasury and international experts to find mechanisms would that entail dealing with “the capital position of the bank.” The mechanisms were described as “complicated”. The unrealised profits are estimated at R497bn. Essentially, borrowing at the repo rate would be cheap funding for the Treasury, but it should be seen as additional debt, not a “magic pot of gold at the SARB.”

Demystifying Currency Manipulation and Speculation in Foreign Exchange Markets

Daniel Makina, University of South Africa

The public brouhaha that has erupted over the alleged currency manipulation by banks in South Africa can be likened to making a mountain out of molehill. Similarly, the jugular reaction of the Minister in the Presidency, Khumbudzo Ntshavheni, blanketly blaming the private sector for the currency manipulation, is a typical case of burning the whole forest to kill one rabbit. Nevertheless, such reactions are understandable given that the foreign exchange market could be one of the least understood markets in functioning economies. The billionaire Warren Buffet once remarked: “The foreign exchange market is the most irrational market in the world”. It is a remark that underscores the challenges we face when we try to predict currency movements.

Currency manipulation

In the literature, currency manipulation is defined as the intentional efforts taken by a government or its central bank to influence the value of its own currency in the foreign exchange market. This is achieved through various ways, typically through buying or selling currencies, adjusting interest rates, or implementing trade policies. The objective for engaging in currency manipulation is to gain a competitive advantage in international trade. In one respect, through deliberate devaluing its currency, a country can make its exports cheaper and more attractive to foreign buyers, potentially boosting its trade surplus. In another respect, a country could seek to strengthen its currency to reduce the cost of imported goods and fight inflation.

Currency manipulation can distort trade balances and lead to tensions among nations. It was one of the causes of the Great Depression of 1930s when nations engaged in competitive devaluations. In other words, it was believed to have amplified the depression. To guard against the practice, the IMF and WTO have provisions that prohibit their members from the using currency manipulation to gain trade advantages.

The alleged transgressions by South African banks cannot be termed currency manipulation because it is a government or its central bank that has the capacity to engage in currency manipulation. At best the transgressions could be described as collusion pricing of currency for either individual traders’ benefit or institutional benefit. Given that the value of the rand in the foreign exchange market is market-determined, the actions of the banks could be interpreted in one of the following two ways. First, the banks might have formed a parallel or black foreign exchange market outside the official market for some of their clients whereby they set or fixed the exchange rate. Conducting a parallel foreign exchange market is considered as market abuse in most jurisdictions. Some jurisdictions go to the extent of arresting such traders. The second possibility could be that the banks were simply conducting ad hoc over-the-counter foreign exchange trading for some special customers whereby the exchange rate was negotiated outside the official foreign exchange market. Such practice happens in almost all markets. A customer receiving a large foreign receipt can negotiate a better exchange rate with his/her bank than the rate in the official foreign exchange market. It is a common banking with significant transactions, such as mergers, acquisitions, large export deals, or capital transactions. In these cases, collaboration between banks can lead to manipulating bids and offers in the market at a specific time. 

However, even in this common case, it is crucial to differentiate between short-term transaction flows and the broader economic fundamentals and global situations that influence the exchange rate over the long term. Moreover, most central banks worldwide – including South Africa – have mechanisms in place to counter such long-term actions and keep the exchange rate. Stable.

Currency speculation

Currency speculation is buying or selling currencies with the intention of making profit from misalignments in exchange rates. Currency speculators can be individual traders or institutions. There are three main types of techniques used in currency speculation. The first type is termed locational arbitrage which is possible when a bank’s buying price (bid price) is higher than another bank’s selling price (ask price) for the same currency. The second type is called triangular arbitrage which is possible when a cross exchange rate quote differs from the rate calculated from spot rates. The third type is covered interest arbitrage whichis the process of capitalizing on the interest rate differential between two countries, while covering exchange rate risk. Covered interest arbitrageis only possible when interest rate parity does not hold. When market forces cause interest rates and exchange rates to adjust such that covered interest arbitrage is no longer feasible, there is an equilibrium state called interest rate parity. Under such an equilibrium state, the forward rate will differ from the spot rate by an amount that is sufficient to offset the interest rate differential between two currencies under consideration.

When the foreign exchange market is efficient, market forces would eliminate short-term possibilities of currency arbitrage. Hence, currency speculation is not a sustainable profitable activity. In an efficient market, the possibility of making profit from currency speculation is quickly eliminated. A notable case of currency speculation happened in the UK in 1992 spearheaded by George Soros who used his hedge fund, Quantum Fund, to borrow billions of pounds from various banks and sell them for other currencies, such as U.S. dollars, German marks, and other currencies. This action by the hedge fund created a huge demand for other currencies and a huge supply of pounds, which drove down the value of the pound in the market. The gamble George Soros took was that the pound would eventually be devalued because there was a limit to how much pain the government was prepared to inflict on its own people. Indeed, the Bank of England pound devalued the pound following a US$22 billion intervention in the foreign exchange market and the UK government withdrew sterling from the European Exchange Rate Mechanism on 16 September 1992. It was a day remembered as Black Wednesday, and George Soros became reputed for “breaking the Bank of England. It was reported that he could have made a US$1 billion profit from that speculative activity.

The impact of alleged case of South African banks

There have been allegations that the actions of the banks caused depreciation of the rand and loss of jobs. Unfortunately, such allegations are not supported by evidence. When we examine the performance of the rand during the period 2007 to 2013 when the banks are reported to have undertaken these activities, we find a different story. As illustrated in Figure 1 below, the dollar/rand exchange rate was relatively stable over this period. In fact, the rand appreciated against the dollar between 2009 and 2011 and only started to depreciate after 2013. On the other hand, the rand/dollar purchasing power parity was stable from 2000 to 2016.

Figure 1: Rand/Dollar Exchange Rate

The National Treasury has also argued that the alleged actions of banks to manipulate the dollar-rand exchange from 2007 to 2013 were not the main cause of the local currency depreciation its value over the past decade, or tepid economic growth. Rather, it attributes the currency depreciation to problems such as Eskom blackouts and the Transnet logistics challenges.

Promoting foreign exchange literacy

Ironically, people living in countries with underdeveloped and inefficient foreign exchange markets have a better understanding of workings of the exchange rate than those living in countries with well developed and efficient foreign exchange markets such as South Africa and developed economies. Most countries north of South Africa do not have flexible exchange rate regimes. As a result, they all have thriving parallel foreign exchange markets operated by informal traders. In fact, informal currency trading is a significant form of employment. I am personally reminded of an encounter when I was in the Gambia in 1993. I wanted to change currency but when I arrived at the bank, I found it closed. However, at the closed door of the bank, there was a young man with bag who told me that he can serve me with even a better rate.

The point I am trying to put through is that adversity has made people in underdeveloped markets to acquire foreign exchange literacy. They did not need to study international finance at university as I did. Perhaps the ignorance of the workings of the exchange rate we see around us is simply because we have not experienced adversity.

S.A listed property – Key considerations

By Shane Packman, Associate Investment Analyst at Morningstar South Africa

South African investors have a love-hate relationship with listed property, with significant shifts in sentiment and demand evident over the last 10 years. Before 2017, it was quite common for multi-asset funds to have healthy allocations to the S.A. listed opportunity set mostly due to the appeal of property companies offering relatively stable dividends.

The S.A. property market demonstrated strong performance between 2013 and 2017, attracting significant investment flows into the sector, as depicted in the chart below.

Sentiment towards the sector began to weaken in early 2018 as market participants became concerned about the overuse of debt, possible financial engineering, as well as corporate governance problems. The sector was further hindered by expensive valuations, unsustainable earnings and deteriorating local conditions. The FTSE/JSE SA Listed Property Index lost 62.6% of its value between 1 January 2018 and 31 October 2020 with most of the drawdown occurring during the outbreak of the COVID-19 pandemic.

While the asset class has recovered somewhat from pandemic lows, industry flows have remained relatively muted. The question for investors is whether the sector still provides opportunity during times of uncertainty.

While market sentiment continues to deteriorate, there have been some improvements in fundamentals to suggest that investors should not ignore the sector altogether.

We consider the different factors impacting the S.A. property sector below.

Diversified revenue streams

Similar to S.A. equities, the S.A. property sector’s revenue decomposition has changed over the years to be slightly less reliant on the local economy for driving earnings.

As can be seen in the below graph, approximately 43% of the revenue of the FTSE/JSE SA Listed Property Index is generated from outside South Africa. Therefore, it is important to emphasize that the sector’s dividend yield and return are derived from both local and offshore revenue streams.

The largest constituent in the FTSE/JSE SA Listed Property Index is Nepi Rockcastle (which accounts for 21.5% of the index) and almost 100% of its revenue is derived from central and eastern Europe. While global property has faced its own challenges, Nepi Rockcastle has reported strong distributable earnings, reflecting resilience from the latter regions.

While the quality of earnings is not as high as in the S.A. equity universe, there is evidence that management teams have attempted to tilt underlying property portfolios towards more global exposure. Most importantly, companies are no longer paying out 90% to 100% of their earnings which significantly improves the robustness of their business models.

Balance sheet strength

The COVID-19 lockdown allowed many property companies to pay down their debt while holding back payouts, reducing their holdings in non-core assets and cleaning up their balance sheets.

This improvement can be observed in loan-to-value (LTV) ratios, that measure a company’s nominal debt against the value of its underlying properties. The graph below shows that, while current LTV ratios are still above the long-term average, there has been a noticeable decline – to levels of around 37% over the last three years. The spike in 2020 was due to write-downs in asset values negatively impacting LTV and interest coverage ratios.

A higher interest rate and lower growth environment is likely to test the resilience of company balance sheets. Nonetheless, the fixed-rate nature of the sector’s debt maturities does provide a buffer in the short term. On average, the sector has 75% – 80% of its debt fixed for an average tenure of between two and a half to three years. We are, however, cognisant that the interest impact of debt on these companies will likely increase as these fixed obligations roll over at higher rates.

Diversified underlying property portfolios

The three segments making up the SA Listed Property Index (SAPY) – namely retail, industrial

and office – have differing landscapes, opportunities, and headwinds.

The largest segment, from a South African perspective, is retail which makes up more than 60% of the index by market capitalisation. Overall, national retail vacancies have shown resilience coming in at 5.4% at the end of the first quarter of 2023, which is below the peak of 7% recorded in 2021.

Recent results in the retail space show signs of resilience and some green shoots, as rental reversions have turned upward. The outlook remains cautious given the health of the consumer, however, there continues to be a reasonable demand for good quality and well-located retail space.

The second largest segment within the SA Listed Property Index is the industrial property sector, which makes up just under 20% of the index. It has continued to be the outperformer among the three major sectors in South Africa, with low vacancy rates (currently at 4.4%) and the highest base rental growth. It is important to note that there are various sub-sectors within the industrial sector and, while manufacturing still faces headwinds, logistics and storage have been buoyed by good demand.

Office space (making up less than 15% of the index) remains tough as work-from-home pressures and weak business confidence continues to hamper vacancy levels. The segment is experiencing a significant demand and supply imbalance (occurring since before the COVID-19 pandemic) which has resulted in national vacancies of 15.6% at the end of quarter one of 2023.

Despite the grim outlook, office vacancies appeared to have plateaued and have slowly declined from their all-time high of 16.7% in the second quarter of 2022. Importantly, the construction of new offices remains low. New office supply is likely to remain muted and be tenant-driven over the short to medium term, given the amount of space readily available and the high costs associated with building.

Discounted valuation

The property sector continues to trade at a significant discount to net asset value (NAV), which falls below its 10-year average.

South African-focused property companies’ NAV growth is expected to be weak on the back of a tough local economic environment. While South African property companies have been battling low economic growth, high-interest rates and a tough trading environment, current valuations do indicate, for some, a particularly gloomy downside. At a current discount to NAV of around 30% – 40%, property valuations would need to fall significantly for investors to suffer permanent losses on capital.

Recent results have also come in better than expected, with global property counters such as NEPI Rockcastle, MAS, and Hystead (wholly owned by Hyprop) reporting excellent distributable earnings growth, reflecting stronger-than-expected regional fundamentals. Driven by strong occupier demand and constrained supply, property valuations have been stable despite higher bond yields in the central European region.

In conclusion

While the market is pricing in particularly poor outcomes, there is evidence of improving fundamentals across the S.A. listed property opportunity set.

The shift in revenue exposure to global markets provides access to a diversified revenue stream, reducing reliance solely on the local economy. Balance sheets are less leveraged with lower LTV ratios and a higher percentage of retained income. Many property companies have also been investing heavily in becoming less reliant on the national power grid, which could potentially improve the long-term sustainability and resilience of their operations. Valuations in the market appear cheap and positive rental reversions and better-than-expected earnings could see a re[1]rating in the sector.

There are, however, significant challenges and negative factors to consider. Local economic headwinds continue to hamper growth, and higher interest rates could become problematic in the future. The weakness in the South African consumer base might also dampen sentiment towards the property sector. The outlook for different segments of the property market is also likely to become an important driver of prospective returns from the sector. Given the difficult headwinds facing businesses and consumers in South Africa, caution remains essential for investors.

ISDA publishes ISDA 2023 Equity Swap – 2021 Definitions Protocol

By Jonathan Haines, James Coiley, Daniel Franks, James Knight, Kirsty McAllister-Jones and Kerion Ball

What has happened?

On 2 October 2023, ISDA published the ISDA 2023 Equity Swap – 2021 Definitions Protocol. Market participants can use the Protocol to amend existing equity swap documentation that references the ISDA 2006 Definitions so that all future transactions reference the 2021 ISDA Interest Rate Derivatives Definitions instead. 

The Protocol opens for adherence on 30 October 2023, but the amendments will not take effect until 18 March 2024 (the effective date). ISDA is encouraging market participants to adhere before the effective date, so that the switch from the 2006 to the 2021 Definitions is effected in a coordinated and synchronised manner. A number of sell-side institutions have committed to adhering during a “pre-adherence” window running from 16 October to 29 October 2023, to encourage broad industry participation.

Market participants will still be able to adhere to the Protocol after 18 March 2024, but the amendments will only affect transactions that are entered into after both counterparties have adhered.

Why is the Protocol needed?

Equity swaps entered into under an ISDA Master Agreement typically incorporate standardised equity swap-specific provisions by referencing the 2002 ISDA Equity Definitions. In order to document interest rate cashflows, the parties also usually reference one of ISDA’s sets of interest rate definitions. Historically, this has been the 2006 Definitions, but these have now largely been superseded by the 2021 Definitions – for example, the 2006 Definitions have not been updated since October 2021, while the 2021 Definitions have been updated every quarter. 

What are the amendments?

When two equity swap counterparties adhere to the Protocol, they amend their existing in-scope contracts so that future transactions entered into thereunder reference the 2021 Definitions instead of the 2006 Defintions. 

A number of consequential changes are also needed. These include:

  • replacing references to any 2006 floating rate option with the 2021 floating rate option that references the same rate;
  • updating certain 2006 terms to corresponding 2021 terms – for example, references to “Fixed Rate Payer” and “Floating Rate Payer” are changed to “Fixed Amount Payer and “Floating Amount Payer”, respectively; and
  • inserting additional fields, such as those relating to compounding and averaging overnight rates, into transaction supplements where necessary. The new fields are set out in an Annex to the Protocol, and match the corresponding line items in the confirmation templates that form part of the 2021 Definitions.

Unlike some of ISDA’s recent Protocols, which offer considerable optionality, adhering parties are not required to make any elections under the Protocol.

ISDA has also developed and published an amendment agreement that parties can use to effect these changes bilaterally, but using the Protocol allows adhering parties to amend multiple contracts with multiple counterparties at the same time and in the same way. This makes it a more efficient process, particularly for entities that have a number of trading relationships in place.

Which contracts are in scope?

The Protocol amends all master confirmation agreements and general terms confirmations (which includes the standard form master confirmation agreements available on ISDA’s website), including any related transaction supplements, that:

  • are entered into by two adhering entities;
  • are subject to an ISDA Master Agreement or one of the French law French Banking Federation master agreements listed in the Protocol;
  • incorporate the 2002 ISDA Equity Definitions and the ISDA 2006 Definitions; 
  • include provisions relating to a “Floating Amount” or floating interest amount; and
  • confirm the terms of one or more equity swap transactions.

The changes made by the Protocol only apply to transactions entered into under the amended documentation after 18 March 2024 (or, if later, the day on which the second counterparty adheres to the Protocol). 

Transactions entered into before Protocol adherence are not affected.  Similarly, transactions which provide for cash settlement under the 2006 Definitions (including where cash settlement applies as a result of the incorporation of optional or mandatory early termination provisions), are carved out from the Protocol’s scope. This is because the 2006 cash settlement provisions were materially upgraded in the 2021 Definitions and amending those provisions in existing equity transactions that reference the 2006 Definitions could materially affect their terms.

How can market participants adhere?

The Protocol opens for general adherence after the pre-adherence period, on 30 October 2023. As with all ISDA Protocols, market participants can adhere electronically, through ISDA’s Protocols page.

Rethinking global investing – a somewhat complicated yet fascinating puzzle to solve

By Debra Slabber, Portfolio Specialist Director at Morningstar South Africa

With equities no longer the only game in town and free money perhaps something of the past, asset allocation has become so much more complicated and a somewhat fascinating puzzle to solve.

With the dislocation present in equity markets from a regional as well as sector perspective – where could money be made in the next decade? Because starting yields from fixed income assets today are much higher, could one argue that bonds have more roles to play today than the traditional uncorrelated nature to equities? How do you construct a portfolio to ensure robustness against a world of glaring problems and how do you ensure a real return for clients given much higher inflation these days?

It was my privilege to unpack some of these very relevant questions at the recent Morningstar Investment Conference South Africa (MICSA). I was joined by panellists James Bullock (Portfolio Manager at Lindsell Train), Gurpreet Gill (Macro Strategist at Goldman Sachs Asset Management) and Sean Neethling (Head of Investments S.A. at Morningstar South Africa).

The session shared insights into the pockets of value from global equity and fixed income markets, and the combination thereof in a multi-asset portfolio. I highlight some key take-outs from this session in the following paragraphs.

Making sense of the macro environment

Investors came into 2023 on high alert for a potential recession. The reality is that if we are in a recession, it is a pretty strange one. The US treasury yield curve is still deeply inverted, but pockets of the US economy remain very buoyant and consumer spending keeps on surprising on the upside. Inflation is moderating, but the Federal Reserve Bank’s tone continues to be hawkish. In addition, most companies on the S&P 500 have beaten profit expectations (thus far). All of the latter combine to ensure a fairly complex macro backdrop.

According to Gurpreet Gill, Goldman Sachs still believes the US is on course for a soft landing and the Fed won’t cut interest rates unless there is clear evidence that inflation is under control.

It’s a strange strange world we live in

One can’t deny that one of the fastest-rate hiking cycles in history has some noteworthy implications for markets – for both fixed income and from an equity perspective.

Gill further added that Goldman Sachs is of the view that a wave of defaults in US High Yield debt is unlikely compared to previous default cycles. Gill further stated that they believe credit is of much higher quality today than it was in the past.

The reason for this is two-fold. With the pandemic shock in 2020, there has been a wave of fallen angels from investment-grade companies that entered high yield. The second reason is that there has already been a default cycle a couple of years ago. One can also argue that most companies in the US entered this environment from a position of strength. It is however important to take into consideration that fixed-income instruments may behave more like equities in volatile and uncertain environments. It, therefore, remains imperative to assess every opportunity on a bottom-up basis and consider the role it plays in a client’s multi-asset portfolio.

From an equity perspective, 2023 has been all about US Tech – Artificial Intelligence (AI) in particular. Most of the gains (to date) in the US market have been driven by a very narrow set of companies. This results in an overconcentration of the index and it potentially exposes investors to very significant downside risk.

US valuations are lofty but pockets of opportunity remain

With US Tech valuations being on the lofty side, fund managers must hunt elsewhere to ensure that client portfolios are exposed to areas that are more attractive on a relative basis.

According to James Bullock, Lindsell Train is still finding plenty of opportunities outside of the US tech complex – particularly in markets like the UK or Japan. There are still plenty of high-quality companies with strong balance sheets and heritage brands that can compound growth for investors over meaningful periods of time. Lindsell Train is also very bullish on video games as a sector as well as consumer defensive stocks. Lindsell Train also gets emerging market exposure indirectly through companies that generate earnings from markets like India for example.

According to Sean Neethling from Morningstar Investment Management South Africa, Morningstar’s global portfolios are also underweight US equities and US tech. Implied returns are below levels investors should be earning to adequately compensate them for the range of potential outcomes in a volatile market, hinging on the growth prospects of high-quality but exceedingly complex and expensively priced businesses.

From a Morningstar perspective, emerging markets remain an interesting opportunity, bearing in mind that emerging markets are not a homogenous group of shares with the same alpha drivers. China’s latest economic weakness has spooked markets, with a stream of media coverage about deflation and property developers collapsing. According to Neethling, the case for exposure to China remains intact and is supported by sensible sizing across Morningstar’s most aggressive S.A. global and local mandates. Brazil is another opportunity that Morningstar continues to hold in portfolios and it has served clients well.

Should one be dialing risk up or down in portfolios at this point in time?

The panel consensus was neither. At Morningstar, we don’t believe that investors are being adequately compensated for taking on additional levels of risk today. Even though there are pockets of opportunity and one could build portfolios that are differentiated, we would not be advocating for increasing risk at a total portfolio level at this point in time.

In closing

More could go wrong than what potentially will go wrong. There are a lot of very visible risks across the globe at the moment and, understandably, investors are feeling very nervous. Despite this, global equity and fixed income managers today are cautiously optimistic about the long-term prospects of opportunities presenting themselves.

Having a disciplined and robust investment process with a strong focus on valuation and position sizing helps us navigate these uncertain waters. Investors must make sure they are in the right type of strategy to be able to stomach an environment with a high degree of uncertainty and a wide range of outcomes.

Introduction of JSE and Xpansiv Collaboration: New Carbon Market Unveiled by JSE Ventures


With keen interest, SAIFM acknowledges the recent collaboration between the Johannesburg Stock Exchange (JSE) and Xpansiv, the global environmental markets infrastructure provider. This collaboration introduces a new avenue, the carbon market, through a distinct legal entity, JSE Ventures, allowing local participants to trade carbon credits and renewable energy certificates within local or global registries. Clients will enjoy access to Xpansiv’s global platform for spot trading, auctions, and quotes, offering substantial advancements toward sustainability objectives. Given the significant surge in voluntary carbon markets worldwide from 2020 to 2022, this development marks an opportunity to position South Africa as a pivotal contributor to the global decarbonisation narrative. Spearheaded by Leila Fourie, JSE Group CEO, this initiative aims to foster carbon offset projects, attract investment, and fortify the nation’s commitment to climate action. For additional information, refer to the press release here.

Minister buys more time as markets respond positively to the MTBPS

Kim Silberman, Economist and Macro Strategist, Matrix Fund Managers

The Medium-Term Budget Policy Statement (MTBPS) shows that National Treasury is doing its best to hold the line against rising political pressure to increase spending. Although spending excluding interest on debt has increased this year by R30 billion, of this R27 billion is financed by re-prioritising existing spending. While this may not be possible, it is important that Treasury is signaling to investors its intent to respond to political pressure in the most prudent way possible.

The outcome of the debt profile in the MTBPS was largely expected and in line with our in-house expectation that issuance of South African local currency bonds would not be increased, despite the rather terrifying redemption profile that SA faces over the next ten years. South Africa’s rand denominated redemptions have averaged R33 billion per annum over the past five years; however, over the next five years it will average R130 billion per annum.

And, five years after that, out to 2031, the amount of local currency debt maturing will rise to R250 billion per annum. This is cause for concern, considering SA runs a budget deficit of between R300 billion and R400 billion, which means not only do we need to raise debt to pay down maturing debt, but SA also needs to raise debt to pay its annual bills.

In addition, because the country’s credit worthiness has deteriorated in the eyes of investors, debt that was issued in the past at par i.e., for every R1 of debt the fiscus incurred, it received R1 in cash, SA now issues at a discount of around 83 cents i.e., for every R1 of debt incurred Treasury only gets 83 cents. This runaway train is accelerating exponentially and unfortunately our National Treasury has less and less control over the budget.

In order to reduce the cost of debt, the MTBPS shows that, where possible, Treasury is shifting its debt profile away from instruments with long-dated maturities towards those with shorter-dated maturities that are cheaper, such as Treasury-bills, Floating Rate Notes with three- and five-year maturities, and a newly announced local currency Sukuk (Islamic Bonds).

Candid Minister

Finance Minister Enoch Godongwana was decidedly candid in his speech, stating that SA’s fiscal situation is unsustainable. He also explained that government spending is unproductive, citing that while spending by government has been increasing, GDP per capita has been falling, questioning the theory that reducing government spending will have a negative effect on growth.

Markets responds positively

Markets saw a relief rally on the absence of any negative surprises in the budget. The rand, which had already firmed ahead of the speech, greeted the news with a further 1% gain to dip below the R18.60/$ mark, bringing total gains since last Friday to 3.3%.

The 10-year RSA bond dipped 20 basis points on the news while the 5-year bond saw a similar uptick, reflecting the confidence being placed in this medium-term framework.

We expect that by 2025/26 a decision will have to be made with respect to restructuring and rationalising government’s spending on the SRD grant, job programs, social grants and free basic service provisions. Without this, South Africa will have to adopt increasingly unorthodox and interventionist public finance policy measures, in order to keep issuing debt at yields which are in line with our current BB rating.