It’s going to be a bumpy ride for the rand

The rand is recovering strongly after hitting a record low earlier this month, but its trajectory will likely be characterised by heightened volatility.

Investec Chief Economist Annabel Bishop said that the rand has returned to R18.60/$, which was forecasted for the quarter, an improvement after hitting a record-low of R19.93/$ earlier this month.

Bishop noted that the rand weakened earlier this month due to fears that the pro-business DA would exit the government of national unity, which worried investors and financial markets.

The rand is expected to improve further throughout the second quarter, benefiting from the recent weakness of the US dollar.

The dollar index dropped back to levels in 2022 after recovering from the impact of COVID-19 on the markets.

The rand remains highly volatile, as it is susceptible to movements in global financial markets and local politics.

The increased volatility also comes despite an improved working relationship between the two largest parties in the GNU following the Budget debacle.

Although South Africa does not have a Budget following Finance Minister Enoch Godongwana’s withdrawal of Budget 2.0, the DA and ANC are expected to work closely together.

South Africa’s two largest political parties were at loggerheads over the proposed increase in VAT to 16% by 2026.

Following the first Budget’s last-minute delay in March, the DA did not support Budget 2.0 in parliament, placing huge question marks over its continued involvement in the GNU.

Amidst widespread criticism, Godongwana withdrew several Bills that made up Budget 2.0.

The DA also defeated Godongwana in Court over the passing of the fiscal framework, which stopped an increase in VAT to 15.5% on 1 May, which would have still gone ahead despite the withdrawal of the Budget.

Good news for South Africa

South Africa is set for a third Budget revision, which is expected to see some expenditure cuts due to the lack of VAT increase and the challenges of pushing other taxes higher, given the weak economy.

Most spending and revenue collections will proceed as usual without a budget, resulting in no disruption to the government’s functioning.

There will also be no changes in the government’s interest payments on debt or its ability to raise debt.

Without the additional VAT hike, the additional signalled increase in VAT exemptions for basic goods will no longer occur.

Bishop noted that the fiscal position will be tight, with any additional revenue going to expenditure and fiscal consolidation delayed.

She added that faster economic growth is needed to sustainably boost government revenue, noting that tax increases slow economic growth, with the tax burden already growing heavily over the last decade.

The incoming revised versions of the Appropriation Bill and Division of Revenue Bill from the National Treasury are not expected to be market-moving, avoiding further borrowing.

National Treasury said that the need for other expenditure decisions was revised due to the lack of a VAT increase, adding that it would propose expenditure adjustments to cover the revenue shortfall.

Treasury added that any additional revenue collected by SARS will need to be considered for this purpose going forward to offset the unavoidable expenditure adjustments.

The improved relationship between South Africa’s two largest political parties in the GNU should mean that Budget 3.0 can be passed in Parliament without needing non-GNU members.

Looking at international positives for South Africa, the US and China are seeing improved discussions, indicating that US tariffs on China could ease, boosting the global economy.