How Gigaba’s budget could affect the rand
There has been major build-up to today’s budget presentation, with the rand weakening slightly ahead of what is expected to be finance minister Malusi Gigaba’s last budget speech.
However, judging by the performance of other emerging markets over the past few days, coupled with the dollar strength in the market, the rand is performing relatively well compared to its peers at the moment.
This is according to Bianca Botes of Peregrine Treasury Solutions, who said that the fact that the rand has failed to slip further speaks volumes of the current upbeat political sentiment in South Africa under the new leadership of President Cyril Ramaphosa.
“There is much speculation in the market that, following the budget speech, there will be a cabinet reshuffle. If so, it still remains to be seen who will be placed in what positions and whether the cabinet will look the same in terms of numbers and structure,” Botes said.
“Ramaphosa has said that there will be massive government cuts in terms of staff and exactly what that holds for each department and how that will be done is anyone’s guess.”
However, today the core focus will remain on exactly where the essence of government spending is taking place and where the funds will come from, Botes said.
“There is much anticipation regarding how the troubled SOEs will be rescued, how they are to be financed and, most importantly, how they will be restructured. There is a sense of urgency regarding salvaging these companies for the benefit South Africa rather than having them as a liability to the country.
“We also expect to get clarity on free tertiary education – how that will impact on the budget and where the funds will come from. And, perhaps most importantly, eyes will be on how we are going to utilise fiscus money to invest back into the economy to stimulate growth, and stimulate businesses,” she said.
Botes said that Gigaba also has to look at increases in revenue, how this will affect the consumer and how it will be achieved.
“Will it, once again, only be personal and company income tax or will we start looking at a VAT increase that has a much wider base? And if there is a VAT increase, what type of VAT increase will it be?
“Will it be a broad-based one or will it potentially only be levied on fuel for the time being?”
Effect on the rand
The rand was trading steady at around R11.77 to the dollar on Wednesday morning.
However, Botes said that Peregrine does expect volatility in the market ahed of and during the speech – with the rand rising as high as R12.00 to the dollar, should the budget be perceived as weak and without much substance in terms of stimulating economic growth and igniting investment.
“We do, however, believe that the positive sentiment in the rand will see it continue to rally until post the Moody’s announcement on 8 March,” she said.
“The chances of a downgrade then, even if we have a slightly weak budget, is subdued because of the appointment of Cyril Ramaphosa and the heartening rally taking place.
“External entities would like to give South Africa a chance to prove what we stand for, what the new policies are and give the new administration a chance to implement them.
“For today, then, we look to rand volatility and rapid movement underpinned by the positive sentiment. The rand will continue to trade a step up amongst its peers compared to the US dollar.
“We expect a range of about R11.75 to R12.05 where there is some good resistance,” she said.
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