Rand strengthens as budget speech avoids nasty surprises

The rand strengthened 1.1% in afternoon trade on Wednesday, after finance minister Malusi Gigaba delivered a budget speech that steered clear of any shocks or nasty surprises, falling in line with what many analysts were expecting.

Following the speech, the local unit firmed from R11.76 to R11.63, indicating that investor confidence in the budget has improved.

“The overall sentiment is positive, although the budget speech poses specific challenges,” said Wessel Lemmer, senior agricultural economist at Absa AgriBusiness.

“Measures announced to curb the national debt, public spending and to increase government income through fiscal measures may have addressed Moody’s standing concerns on these issues.”

“However, Moody’s will have the last say and in light of the measures announced today; we expect Moody’s to postpone a downgrade at the end of February.”

Ahead of the speech, the rand traded slightly weaker as investors and traders bade their time for clarity on how the national government would plug a R50 billion hole in the budget.

Many expected a VAT hike as well as tougher taxes on the country’s wealthy.

What Gigaba delivered was pretty much in line with these expectations, with VAT increasing to 15%, and ad valorem excise duties, estate taxes and donations taxes also hiked.

According to some analysts, the budget did include some surprises, but they were quite positive – specifically, the adjustment of the country’s tax brackets, where the expectation was that they would stay the same.

Another positive surprise was the move to keep medical aid tax credits – albeit with a new caveat, where it would be capped, to make way for the National Health Insurance levy. It was anticipated that the tax credit would be done away with entirely.

Despite talk of removing the zero-rating for VAT on fuel in the country, this, too, was not announced. However a hike in the general fuel levy as well as the Road Accident Fund levy delivered enough of the same effect.

According to Kwaku Koranteng, acting head of Absa Asset Consulting, the budget speech – along with recent political developments in the country, as well as the attempts to improve and stabilise the country’s State Owned Enterprises – will help in avoiding another downgrade.

“The market feels that the budget will be good enough to stave off a downgrade by Moody’s,” Gordon Kerr, a fixed-income analyst at Rand Merchant Bank told Bloomberg.

The budget “looks like a safe and steady approach,” said Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London. “It was a potential banana skin that’s been avoided and this looks to me like exactly the kind of slightly more conservative, stable, playing-it-steady approach that the markets were hoping to see from Ramaphosa.”

The rand has advanced 12% since Cyril Ramaphosa was elected as leader of the ANC in December, setting him on a path to become the country’s president when Jacob Zuma resigned last week.

Read: All the major tax changes you need to know about

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Rand strengthens as budget speech avoids nasty surprises