The National Treasury’s international roadshow teams have spent the past year telling investors South Africa is on an improving trajectory.

They’ve had an easy audience — emerging markets outperformed developed markets by about 13 percentage points last year, bonds rallied hard and the rand was one of the world’s best-performing currencies. Everyone was making money, so audiences readily bought the pitch.

The Iran war has changed that. In the two days after Sunday’s bombing, the JSE fell 6.4% in dollar terms. Post last week’s budget, those same teams are out meeting investors again, this time needing to convince them that South Africa deserves to be separated from the emerging market basket at a moment when risk appetite has soured.

For anyone with South African market exposure, the key question is whether they will succeed.

The two days after the bombing have not been encouraging. The reversal comes after a strong start to the year, with emerging markets up 12.8% so far against a measly 2% for developed markets.

South African bonds rallied hard, with yields on long-dated paper around 2.5 percentage points lower than a year ago. The rand was among the world’s best-performing currencies, alongside its Brazilian, Mexican and Chilean peers.

That rally reflected real factors: investors seeking better yields than a weakening dollar could offer, avoiding overheated AI valuations and US institutional risks, and finding emerging-market debt offering on average 2.5 percentage points more yield than developed markets (and more still in South Africa).

Goldman Sachs research shows hedge fund allocations to emerging market stocks hovering near five-year highs. Such funds typically employ leverage, meaning any shift in sentiment could trigger substantial outflows.

The question now is whether the fundamental drivers remain intact or whether we’re at risk of a 1998-style rush out of emerging markets. The objective is clear: South Africa must differentiate itself from the broader emerging market basket through its recovery story and its distance from conflict zones. The National Treasury’s teams will spend the coming weeks on international roadshows making exactly this case.

It is going to be a tough sell. Start with the claim that South Africa is structurally different from other emerging markets. The argument goes that we have better fiscal positioning than developed markets (debt-to-GDP of about 76%, versus a 112% developed-market average) and a clear distance from Middle Eastern and Turkish exposure. Yet this sets a remarkably low bar.

Most Asian emerging markets have stronger growth, superior infrastructure and better fiscal positions than South Africa. Many Latin American countries offer commodity upside. What exactly is South Africa’s unique selling point beyond “we’re improving from a historically low base and we’re not geographically in the war zone”?

The structural reforms cited as evidence of differentiation — stable electricity supply, gradual logistics improvements, credible fiscal consolidation — are real but incomplete. Load shedding has ended, but grid capacity remains constrained, and private investment in new capacity is still only beginning.

Rail and port performance is improving from crisis levels, but “gradual” does not inspire confidence when investors need conviction. The budget showed continuing fiscal discipline, certainly a strong point, though achieving sustained growth above 2% remains an aspiration supported more by hope than by concrete drivers.

More fundamentally, the reforms that matter most for differentiation have not happened. South Africa still lacks the regulatory certainty, implementation capacity and institutional strength that would genuinely set it apart.

The government of national unity’s stability is reassuring, but holding together for nine months does not prove it can deliver the structural shifts needed to break out of the emerging market basket.

The real test comes from how exposed South Africa is to the specific risks this war creates. The most material is oil. Iran has declared the Strait of Hormuz closed, through which about a fifth of global oil supply moves. Oil prices have rallied about 16% in a week.

For net importers like South Africa, this is directly inflationary and raises the risk that interest rates creep upward, constraining the consumption recovery underpinning the growth story. The Reserve Bank may have limited room to look through import-driven inflation if it becomes persistent.

US inflation risks look elevated anyway, and bond yields have been volatile. If the yield differential narrows — and particularly if US rates rise — the fundamental case for emerging market debt weakens materially. At what oil price does South Africa’s inflation-growth trade-off become untenable? What happens if crude hits $120 or $150? These are plausible scenarios if the conflict escalates or drags on.

Then there’s the leverage question. If hedge funds are near five-year highs in emerging market allocations with leveraged positions, deleveraging could be sharp and indiscriminate. Hot money does not carefully parse each country’s characteristics during risk-off episodes — it exits emerging markets as a class. South Africa’s external financing requirement makes it vulnerable to such flows.

This brings us back to whether South Africa can make the differentiation case effectively. The positives include the budget’s fiscal consolidation, structural reform progress and distance from conflict zones.

But sophisticated investors will ask hard questions about implementation capacity, about what happens if oil stays elevated, and about whether 2% growth is sufficient to generate the tax revenue and private-sector confidence needed to sustain the trajectory.

The test is whether the underlying case is there yet. Of course, investors want to be ahead of the market. They will move quickly even if current evidence only shows the right trajectory. The problem is that the improvement is real but fragile. And the Ramaphosa presidency now has less than two years to run, with limited visibility on what follows.

The domestic outlook depends partly on protecting the market gains achieved before the war. Strong pension-fund performance creates wealth effects that support consumption and lower the cost of capital for companies.

The wins came from global emerging market momentum that South Africa rode, combined with unique local factors. If that momentum reverses, South Africa will not be insulated by differentiation narratives.

The war will inevitably damage global risk appetite. Emerging markets will face renewed scrutiny. South Africa can either demonstrate genuine differentiation through accelerated reform implementation and clear evidence of a shift to higher growth or continue making the case on PowerPoint slides while markets render their own judgment.

The latter approach worked during the rally. It will not work during the reckoning.

• Dr Stuart Theobald is founder and chair of research-led consultancy Krutham.
  This article first appeared in Business Day.