Rand on edge as markets hold their breath for the budget
South Africa’s rand was trading steadily on Monday (20 February), but remained at weaker levels as markets await fiscal policy decisions by the finance minister this week Wednesday (22 February) in his budget speech.
According to Reuters, the dollar was also little changed against a basket of global currencies.
South Africa’s rand has had its worst start to the year in over a decade, with a 7% loss of value against the US dollar in the first six weeks of 2023, reported DailyInvestor.
From an international perspective, a stronger US dollar and South Africa’s economic problems, including load-shedding, failing infrastructure, and policy uncertainty, are some of the reasons behind the weakened currency.
Additionally, the robust US labour market, which may lead to prolonged high inflation and interest rates, has further supported the US dollar.
Domestically, the finance minister Enoch Godongwana is expected to present updated revenue, expenditure and economic growth forecasts for the country.
Further plans for the government to take on a sizeable amount of debt from the failing national power utility Eskom are also expected.
A Reuters poll last week predicted that the consolidated budget deficit would narrow to 4.5% of gross domestic product (GDP) for the fiscal year beginning in April and to 4.4% of GDP for the following year, from 4.8% of GDP in 2022/23.
Jeff Ryan, the managing director of AWCape, said that CEOs and financial leaders alike are awaiting hard-hitting plans for South Africa’s economy. Ryan said that revenue collection would also be a hot topic this week.
He said that it is not exactly clear what government plans for business tax.
“It is my recommendation that corporate tax rates should be significantly reduced in these circumstances. The rationale being a lower corporate tax burden for businesses will enable them to invest and grow in their businesses.”
This results in greater profitability and subsequently increased employment, said the managing director. This increased employment leads to a greater income tax base, which increases the overall tax collected.
The rand also faces the possible knock-on effects of a greylisting this week, with markets sitting in anticipation of a likely reputational knock for South Africa that could hurt some local asset prices.
The potential greylisting would increase the difficulty of doing business with the country due to additional compliance measures, especially for cross-border transactions.
A report by Business Leadership South Africa (BLSA) and Intellidex suggests an 85% chance that the international watchdog, the Financial Action Task Force (FATF), will rule against South Africa.
The impact on GDP is estimated to be under 1% if the government acts promptly but could reach 3% if South Africa is perceived to be slow and unwilling to meet the FATF’s standards.
The rand is currently trading:
- Dollar: R18.13/$
- Euro: R19.37/€
- Pound: R21.80/£
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