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Making light of a dark situation

Emergence through emergency

In the face of adversity, South Africans have shown their resilience and “made a plan”. Adapting to persistent loadshedding in 2023 means efforts to combat loadshedding have gained, and continue to gain, traction.

The chart below, shows how SA businesses and consumers are making light of a dark situation. Installation of alternative sources of power is accelerating, reinforced by related tax breaks announced earlier in the year.

In 2023, South Africa’s economy has surprised on the upside with GDP growth more than market expectations as shown in the chart below. Even though at a low hurdle, the market is extrapolating the economic impact of loadshedding into perpetuity with near term expectations for Q3 and Q4, at 0.2% and 0.3% respectively.

Should quarterly expectations play out, South Africa would achieve YOY growth of 1.5% vs an estimated 0.9% announced in the 2023 budget earlier this year. Not a bad outcome given the environment and generally poor sentiment.

Local investors carrying the torch

Current South African debt prices are clearly forecasting a dire growth outlook, with energy access being the main constraint to economic growth. Given an energy availability factor of 55% (measure of SA’s ability to produce power), the lack of optimism being priced into our local bonds comes as no surprise. Furthermore, SA’s financial health is weighing on markets and as finances become more stretched through growing twin deficits (trade and fiscal), our funding requirements and costs continue to increase. Added to this, the probability of an impending debt spiral rises.

Funding these deficits, means increasing treasury issuances are on the horizon and given weak foreign appetite for our debt (depicted below), it remains up to the locals to shoulder the burden and keep the state afloat.

Keeping a spotlight on opportunities

The SA yield curve is currently pricing in a significant amount of “doom and gloom”. It is often under these conditions, where we’re able to find return opportunities. Continued upside surprises to GDP growth are not being priced in. Increasing GDP would reinforce the notion that a peak in Debt-to-GDP can be achieved, if we can demonstrate restraint on our spending.

Truffle fixed income allocations remain well within our risk budget of permitted duration from South African Bonds. However, we continue to believe these instruments present an attractive return profile on a relative basis. It is important to adopt a nimble and flexible approach to portfolio construction as the market and our investment views change. As inflation tracks its glidepath down to 4.5%, local bonds are offering real yields that meet multi-asset benchmarks of CPI + 3% – 6% at volatility below that of equity.

Presently, we take the opportunities as markets shift, to add duration to the Truffle portfolios at rates that compensate us for the inherent South African balance sheet risk, plus a margin of safety.

This article appeared in the October edition of Money Marketing MoneyMarketing October 2023 (

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