The rand eyed a move back below R15 against the dollar on Tuesday as markets anticipate a positive budget speech on February 24, to be delivered by Finance Minister Pravin Gordhan.
Since his reappointment, Gordhan, has overseen significant strengthening in the local currency, from a worst ever level of R17.99 against the US buck as recently as 11 January.
On Tuesday, the rand traded at eight week highs against the dollar – R15.23, and also firmed against a weaker British pound – R21.48.
Reuters reported that the currency hit a best level of R15.1930 on Monday.
Following President Jacob Zuma’s announcement of cost-cutting measures during his state of the nation address, the market has priced in a convincing budget speech, Reuters reported.
“Expectations are now high for the Budget, as the rand has strengthened in anticipation,” said Investec chief economist Annabel Bishop, in a note on Tuesday.
While modest tax increases are anticipated, no more than 1% higher for the marginal tax rate, and a rise in the fuel levy and possibly also a 1% rise in VAT, a wealth tax may make its advent on high net worth individuals – R7.5 million plus in revenue or R75 million plus in assets, Bishop said.
“The paucity of individuals earning above R500,000 per year in SA makes raising income based tax inadequate on its own to plug the spending gap, as current spending should be cut. Broader tax measures such as VAT raise more revenue, but all tax increases stifle economic growth,” the economist said.
Bishop said that the country’s economic growth is too weak to stomach marked tax hikes “as the economy has suffered under populist direction since 2009”.
Should the budget fail to deliver ‘over consolidation on the fiscal front’, particularly in a sharp cut back in current expenditure, Bishop said that the market should expect the rand to weaken again.
The rand has also strengthened recently in expectation of a new foreign exchange control and tax amnesty, “which is hoped to also broaden the tax base and so assist in making up revenue shortfalls. Its success will depend on sufficient leniency, particularly in relation to tax relief,” the analyst said.
“Expectations of a sterling budget have been front loaded into the rand, particularly some reduction in planned issuance of scrip detailed in the Medium Term Budget Policy Statement (MTBPS), a hiring freeze at all levels of government – with redeployment of civil servants to vital vacant positions – and only modest tax increases.”
“Disappointment, particularly a failure of the debt and deficit ratios to fall from those projected in the MTBPS will likely see the rand weaken and bonds yields rise, as would any further tinkering in the Finance Ministery and Treasury Department that results in the removal of experienced personnel well regarded by the financial markets,” Bishop said.
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