Rand takes a deep breath ahead of mid-term budget

 ·1 Nov 2023

The South African rand is trading slightly stronger on Wednesday (1 November) ahead of the medium-term budget policy statement.

Finance Minister Enoch Godongwana is set to deliver the budget update at 14h00 from the Cape Town City Hall, with markets not anticipating any major shocks.

What is expected, however, is a frank – and bleak – outline of South Africa’s struggling economy, which has suffered the double blow of ill-contained spending amid tighter revenues.

This has led to a significant shortfall versus the February budget, which economists estimate to be between R33 billion and R65 billion.

According to Investec chief economist Annabel Bishop, data shows that South Africa’s expenditure has already hit 51% of what was budgeted in February – versus the 45%-47% usually seen around the same time in previous years.

This has been a market reality for some time, and investors will be looking to see what measures will be put in place by Godongwana in the budget to find a way out of the shortfall.

“South Africa will need to curb expenditure and see higher revenues for the rest of 2023/24 to achieve its fiscal estimates, and markets are wary that in a low-growth environment with high and rising bond yields, this becomes more difficult,” Bishop said.

The budget deficit for 2023/24 was projected at -4.0% of GDP in February, but Investec now expects -4.5%, with 2024/25 estimated at -3.8% and 2025/26 at -3.2%, likely -4.0% and -3.4% instead respectively.

The finance group also expects revenue under-collection of R50 billion for the current financial year.

Regarding the budget shortfall, a Bloomberg poll of 16 experts found that – in some good news for South Africans – the Treasury is unlikely to turn to something as drastic as another VAT hike to find the funds.

Instead, the wide expectation is that the government will turn to raising more debt, with some budget cuts to add some balance to the equation.

However, therein lies the risk to the rand.

“Market and the credit rating agencies will be watching the debt projections, with downgrades a risk on markedly higher debt revisions, and so rand weakness a risk, while strength possible instead on a better than expected budget,” Bishop said.

Even as the government scrambles to find money to plug the gap, the economist warned that additional pressures are likely to be placed on the fiscus – especially with Transnet needing a bailout.

“The MTBPS is expected to provide an update on government’s plans for Eskom’s and Transnet’s debt, with Transnet expected to need a bailout of R100 billion, placing pressure on government expenditure,” she said.

“The annual Budget Review in February tabled a debt relief arrangement of R254 billion for Eskom on a slew of conditions, with the MTBPS expected to give an update on this and the review of Eskom’s coal plants.”

Eskom reported its annual results on Tuesday (31 October) and revealed a massive R24 billion loss for the year. The utility also revealed that it is lining up for another R23 billion loss in 2024.

By noon on Wednesday, the rand was trading at these levels against major currencies:

  • USD/ZAR: 18.73
  • GBP/ZAR: 22.73
  • EUR/ZAR: 19.75

Read: Where you can watch the medium-term budget live

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