Rand slumps as the GNU hangs in the balance

Uncertainty about a key vote on South Africa’s budget and what it portends for South Africa’s coalition government triggered a slump in the rand and bonds.

South African lawmakers are scheduled to vote on a key piece of budget legislation — the fiscal framework — on Wednesday afternoon, with talks between the African National Congress and the Democratic Alliance aimed at resolving their differences over a proposed tax increase at a standstill.

The ANC — the biggest party in the coalition — has sought support from smaller political groups to push the fiscal framework through parliament.

The market-friendly DA, the second-largest group, has said it will oppose the legislation, raising the prospect of it withdrawing from the so-called government of national unity if the law is approved.

“The rand has reacted to the increased political noise around the budget, as some fears have arisen around the stability of the GNU,” said Annabel Bishop, chief economist at Investec Bank Ltd, said in a note.

“National Treasury has noted government will continue functioning, and there is time to reach an agreement, but markets are worried over the sustainability of the GNU.”

The currency fell as much as 1.3% and traded 0.9% weaker at 18.64 per dollar by 13h54 in Johannesburg. The yield on government bonds maturing in 2035 rose 22 basis points to the highest level in almost eight months.

The FTSE/JSE Banks Index traded 3% lowe,r “reflecting a loss of domestic investor confidence amidst noise around a fallout between GNU anchor tenants the ANC and DA,” Rand Merchant Bank strategist Manqoba Madinane said. 

Lawmakers will begin meeting at 2 p.m. in Cape Town to vote on the framework, which establishes economic policy, revenue projections and limits on government spending.

Parliament’s finance committee on Tuesday backed the legislation that includes a proposal to increase value-added tax — the key sticking point between the ANC and the DA — along with a non-binding proviso that the National Treasury find an alternative way to raise revenue.

The decision signaled that the ANC will try and push the framework through parliament without the support of the DA.

The two main opposition parties — the leftist Economic Freedom Fighters and the populist uMkhonto weSizwe Party — have said they’ll oppose the legislation, while smaller coalition parties, including the Inkatha Freedom Party and Rise Mzansi have said they’ll back it.

A simple majority of lawmakers in the 400-seat legislature need to approve the framework for it to pass.

The DA has asked parliament’s speaker to postpone the vote, citing procedural irregularities in Tuesday’s meeting. A similar objection has been raised by the EFF.

President Cyril Ramaphosa, the head of the ANC, and DA leader John Steenhuisen held talks on Tuesday to discuss their differences over the budget, which the DA described as “a very good meeting.”

Subsequent to that, the ANC submitted a final offer for a budget agreement to the DA in advance of the vote, Johannesburg-based Business Day newspaper reported.

There are currently “no negotiations at all,” DA spokeswoman Karabo Khakhau said by phone. ANC spokeswoman Mahlengi Bhengu-Motsiri didn’t respond to a request for comment sent by text message.