raymondparson

Michael Avery

Time for The Week That Was with Warwick Lucas, Private Clients Portfolio Manager at Vunani, and Professor Raymond Parsons from the North-West University Business School and the University of the Western Cape – welcome.

A fortnight ago we were talking about ‘bond vigilantes’. This week they appear to be upgraded from vigilantes to a ‘full posse’. Oil is back above — well, above $100 a barrel and US producer inflation is running at 5.4%. And that American 10-year yield is flirting with 5%. We’ve seen central banks from Washington to Frankfurt, London and Tokyo once again confronting the same uncomfortable problem: inflation that refuses to go away. And back home, our economy contracted 0.2% in the second quarter. So much for ‘escape velocity’.

So, Warwick, let’s start with the bond market. That 10-year Treasury yield approaching 5% is extraordinary. The US Treasury has now substantially increased its long-dated bond buybacks, ostensibly to improve liquidity, and yet yields pushed higher. Is the message now from investors essentially that you can try and improve the plumbing, but you can’t buy your way, or ‘quantitative ease’ your way, out of the fiscal arithmetic?

Warwick Lucas

Yes, absolutely, Michael. The fact of the matter is that you can tinker with it and improve ‘plumbing’ and so on – and take some pressure off dysfunctional parts of the bond market and rework it into others that are going better. But at the end of the day, you’re just fiddling. And that’s a problem when you’ve got $40 trillion of US national debt. If investors are worried about the scale of borrowing and sticky inflation, oil where it is, political pressure for stimulus, et cetera, then fiddling around with a few billion dollars solves pretty much nothing.

So at the end of the day, why is the US Treasury so worried about long yields? A liquidity problem can be managed with technical operations, but a problem takes a fiscal answer. And right now, some fiscal answers need answering. And that’s way beyond the bond market. So, yes, I’m sure we’ll talk about other issues. But some of the fiscal behavior that we’re seeing is quite strange.

And, of course, we saw Trump’s tariffs, which were supposedly going to ‘balance the books’. Well, they got torpedoed. And it wasn’t surprising, because he didn’t implement them properly. He has an implementation problem. Trump was supposed to put them through Congress and get them stamped by Congress. And now hell will freeze over before that happens.

Michael Avery

Well, speaking of the fiscal situation, Raymond, you add Trump’s proposed $5,000 US dollar dividend payment, which is straight out of the ANC playbook ahead of a midterm election: “Oh, we’ll just give you $5,000.” Whatever one thinks of the politics, markets have to try and price the decision, the economics. And at a time of large deficits and sticky inflation, is another trillion-dollar fiscal impulse precisely what the bond market doesn’t want to hear?

Raymond Parsons

Hi Michael. Well, I don’t know whether to laugh or cry about this proposal by Trump. But from a distance, it seems to suggest at least two things: Firstly, from Trump’s point of view, he obviously thinks he’s got his back to the wall on the midterm elections with this kind of proposal whilst electioneering And secondly. with political promises there’s always a big gap as between promise and performance in these matters

So far, there’s been a very broad skeptical reaction in the US, both as to its legality and also the practicality of implementing such a proposal through Congress. So a lot of water would still have to flow under the bridge about this proposal for the markets to respond. From economic and political points of view, given the rest of the present economic outlook in the US, it’s not a big ticket item.

I’m reminded, when I think about this proposal, when we look at the big picture, of what former US President Bill Clinton said in his winning election campaign about 30 years ago: “It’s the economy, stupid.” That’s the big picture there

Michael Avery

Absolutely. Carville, I think, was the one who spearheaded that. And it is all about the economy. And Warwick, oil complicates everything we’re trying to forecast about the economy. Brent is now around $109 a barrel. It takes us right back to the uncomfortable territory we discussed during the Iran shock earlier this year. At what point does an oil ‘spike’ stop being treated as temporary ‘noise’ and actually start changing your inflation and earnings and valuation assumptions? Because this doesn’t look temporary anymore.

Warwick Lucas

Well, yes, absolutely. It certainly starts looking like that kind of a problem when your strategic reserves suddenly don’t look very “reservey”. In other words, they’re looking empty. And of course, that’s a problem because oil above $100 for several weeks is not a day or two where only distressed buyers have to take it. It’s when everyone has to take it and start making serious day-to-day economic choices.

Turning to South Africa, looking at where we are from. We’re watching where the fuel price is going to end up in the month ahead; we’re seeing moving averages that still point to a further two rand a liter fuel hike, approximately, across each category. So that’s not very pleasant and it’s already a bit sore. Now add another two rand a liter at the end of next month, and that’s going to be positively painful. So it’s inflationary, and it feeds through to diesel, freight, food distribution, chemicals, and so on.

Then it feeds through to earnings. Fuel costs compress margins, kill pricing power, and kill activity. And then finally it damages valuations. I mean, if oil keeps inflation sticky, central banks can’t cut rates, long bonds stay high, and valuations compress. And what’s the threshold? I don’t know the actual threshold, but $100 is nice, round, and certainly very, very ‘noisy.’ number. And it’s not day-to-day noise. It’s a long, loud blast of a war horn.

Michael Avery

Yes and it came through, Raymond. Let’s bring it back to South Africa, as Warwick was saying: our economy contracted by 0.2% in the second quarter, which I must commend you for. You were calling that – both you and Warwick – against the grain and that’s after six consecutive quarters of growth. The easy explanation is that it was external. It was Iran, it was expensive oil. But how much of this was an external shock, and how much does it actually expose weaknesses that were already sitting underneath the bonnet?

Raymond Parsons

Michael, what we need to recall is where South Africa was at the beginning of 2026, because indeed I think that our memories tend to be short. A few months ago, when we started this year, we commenced on a positive economic note. Inflation was indeed close to the Reserve Bank’s 3% target, interest rates had been eased and we had a positive national budget. We felt the economy was slowly beginning to move ahead, and that a long-awaited economic recovery was at last gradually underway. The broad consensus forecast then was for about 1.6% GDP economic growth this year.

Now all this has been severely interrupted by the setback in the second quarter, which, as we know, has given us quite a knock — not only to South Africa’s economy but several other economies as well. So we’ve shared this economic pain with several other countries who are also net energy importers.

The question now is: what do we do from now on? And the important point, in my view, is that our economic recovery has not been derailed, but has rather been severely interrupted by the global energy crisis. So the question now is: what do we do from now? How do we accelerate the domestic issues over which we do have control to strengthen a resumed recovery? Do we have some cards to play?

So that brings us back to the pace of our structural reforms: we now need to show much more evidence, particularly because of the global setbacks, that what we are doing on the reform front is visible, irreversible, and tangible. And unless we do that, we’re going to find that we’re not going to break out of this narrow growth corridor of about 1%-2%.

As things stand at the moment, given where we stand today, I see reduced GDP growth at about 1,2% in 2026 – rising to perhaps 1.6% or 1.7% next year. But a lot depends on whether we can mobilize our domestic policies to do better, given the severe global headwinds we have been facing.

Michael Avery

Warwick, you said during the week you were surprised it wasn’t a deeper decline. Why?

Warwick Lucas

Well, basically, look, the 0.2% contraction looks mild. But the moving parts are quite ugly – mining in a rough place, manufacturing in a rough place, trade down.

And the other point was the timing distortion. Because South Africa’s fuel price is set by a formula and adjusted monthly, when a firm knows a large fuel-price hit is coming, it can ‘game’ it. And there’s an incentive to pull forward transport deliveries, stock movements, and inventory generally while the old, lower fuel price is still in the system.

And, you can actually see some of that pulse. If you go to motor trade sales, you’ll see the pulse in March and the fuel sales, when everyone clearly knew the price hike was coming, and there was nothing that could be done about it.

There would have been an element of frustration, as you had hoarding and stocking to one side, causing fuel shortages. And, indeed, those fuel shortages did happen, which is what happens when you create a fuel price that can be gamed instead of one that is market-related. But be that as it may, it really it was an anticipation of behavior as much as anything else, rather than any technical foresight.

Michael Avery

Raymond, though, we keep talking about structural reform. Electricity and logistics are showing signs of turning. And the President does point to progress. We’ve seen Transnet making its first profit in several years, obviously, again, with state bailouts, much like Eskom. But when should reform start becoming visible more broadly in gross fixed capital formation, rather than just in policy announcements and confidence surveys?

Raymond Parsons

We need to be seized with ‘implementation’. In a nutshell, it means we got in particular to build on phase three of the recently announced further intensive step in the partnership between government and business – in its partnership in five or six crucial areas of the economy. They’re now talking about ‘hard targets’ and about expediting implementation ways that will boost business confidence in future.

We need to reverse what has, up until now, in recent times, been quite a negative trend as far as fixed capital formation is concerned. So that’s the challenge: get past the purely political statements. It means to recognise and accept that what you’ve committed to doing with the private sector can only be done with the private sector, so that you can turn the economy around sooner rather than later.

Michael Avery

Well, that’s where we’re going to have to leave it. Alot to also confront by the Reserve Bank, and all of this will land on their desk on the 23rd of September. So I’m sure in future we’ll be unpacking some difficult choices — Hobson’s choices, I might say — that face the Reserve Bank Governor and his MPC. Thank you, Raymond Parsons and Warwick Lucas, as always, for your insights.