South Africa delivers a dud

 ·7 Nov 2023

Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Statement (MTBPS) last week has been met with indifference by markets, with the credibility of the government’s capacity to execute its plans pulled into question.

While local economists have labelled the MTBPS as “credible as can be” given the economic reality of South Africa, bond markets did not respond well to the budget, and even the rand’s recent gains against the US dollar probably had little to do with the outcome.

According to RMB chief economist Isaah Mhlanga, in the runup to the MTBPS, analysts broadly priced for a fiscal slippage from the 3.9% deficit for 2023 projected in the February Budget Review to a deficit of 5.1% or 5.2%.

In the end, the MTBPS projected a main budget fiscal deficit of 4.7% of GDP for 2023 and about a 1% of GDP deterioration over the medium term.

While this was better than expected, Mhlanga said this was likely an intentional strategy by the National Treasury to come in better than expectations. Subsequently, this has pulled the credibility of the budget into question.

Looking at the bond markets, Mhlanga noted that between the February budget and the MTBPS, SA bond yields saw a rise, reflecting global tightening of financial conditions and South Africa’s worsening fiscal position.

After the MTBPS, bond yields declined – but only to the extent that reflected the moderation in global financing conditions, the economist said.

The simple interpretation of these movements is that “SA bond markets have not responded positively to the MTBPS, given that the decline in domestic bond yields coincided with the decline in US long-term bond yields,” Mhlanga said.

For those not practised in the ways of reading the bond market, there are other indications that the MTBPS fell flat.

While the rand strengthened following Godongwana’s address – leading to interpretations of a well-received budget – Mhlanga said the recoveries have more to do with global movements and not so much with the Treasury’s plans.

“Before the MTBPS, the USD/ZAR was at R18.65, about 2.2% weaker than where it was on the day of the Budget on 22 February 2023.

“Over the three days post the MTBPS, the rand gained 39 cents to AR18.26 — 2 cents higher than where it was on Budget day. Effectively, the USD/ZAR has recouped all losses it sustained since the Budget,” the economist noted.

The JP Morgan emerging markets currency index suggests that the rand has performed relatively better compared to other emerging markets over that period. However, Mhlanga said that this might be because the rand has been oversold relative to its emerging market peers.

“Thus, (the rand’s stronger) performance is some sort of payback,” he said.

“Over the three days post the MTBPS, EM currencies gained 1.53% while the rand gained 2.1%. Again, this makes it difficult to disentangle South African drivers from global drivers.

“The only logical conclusion looking at bond markets, CDS markets and currency markets is that the performance of these markets post the MTBPS was driven by global factors – particularly the decision of the US Fed to keep rates unchanged and the softening of US labour market data, which had the combined effect of reinforcing the view that the Fed is done hiking rates.”

Read: Rand could be heading to under R18 to the dollar

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