Rand takes a hit – with all eyes on the Budget

 ·20 Feb 2024

The rand has weakened with the market worried about South Africa’s marked fiscal slippage.

In the 2023 Medium-Term Budget Policy Statement (MBTPS), gross debt was projected to peak at 77.7% of GDP in 2025/26, far higher than February 2023’s Budget estimate of 73.6%.

Investec Chief Economist Annabel Bishop said that the nation’s gross debt projections of above 70.0% of GDP by 2031/32 reduce the sustainability of government finances, as an emerging market should have a maximum sustainable debt ratio of 60%

“Expenditure is already 74.2% of the budget for the first three quarters of 2023/24 (and revenue 71.5%), versus expenditure of 70.1% for the same period of 2022/23 (revenue 72.2%) – a marked drop in the projected debt to GDP ratio for this year is unlikely,” Bishop added.

The 2023 Budget also projected gross debt at 72.2% of GDP, which was then increased to 74.7% in the November MTBPS, highlighting the decline in fiscal health.

The budget deficit was also revised from -4.0% of GDP to -4.9% in the MTBPS, showing further fiscal slippage.

“Indeed, markets worry about an even worse outcome, given 2024 is an election year, and the ANC is seeking to cling to power by making election promises already, which will place even greater expenditure pressure on the budget finances,” Bishop said.

The rand is trading at just under R19.00/$ after seeing large increases from the previous weak.

Investec’s GDP forecast for 2024 of 1.0% aligns with that seen in the MTBPS, but the MTBPS’s prediction of 1.6% is likely too strong, which could lift the gross loan debt projection to GDP for 2025/26 higher, adding even further fiscal slippage.  

Financial markets do not respond positively to increased borrowing, especially when expenditure does not match the decline in revenue, which has been the case for South Africa over several years, causing bond yields to bounce up and credit ratings to plunge.   

Markets are also concerned about increased populism creeping into the Budget, as polls show that the ANC may lose its national majority in the upcoming elections.

Bishop said the ANC prefers the more fiscally astute IFP as a coalition partner, expecting it to get 46% of the vote. However, more recent polls show a greater loss in support for the ANC, worrying markets.

In addition, the Budget is expected to show plans to tap into the nation’s Gold and Foreign Exchange Contingency Reserves Account (GFECRA)

There are worries about what the funds would be used for, such as higher public wages instead of a more sensible reduction in debt.

“Using the GFECRA to reduce debt (at a maximum of less than 10%) would be a temporary measure in a weak economy, with debt likely to just creep up again, with South Africa’s debt of R5.2trillion and the GFECRA cannot be quickly replenished,” Bishop said.

Fears also surround the expansion of the Social Relief and Distress Grant into a Basic Income Grant and increasing its monthly allowance from R350, potential Transnet and Eskom bailouts and under-pressure tax collections.

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