Rand takes a hit after budget speech

Finance Minister Pravin Gordhan has delivered his 2016 budget speech to Parliament, after which the rand weakened from R15.23 to R15.58 against the US Dollar.

Gordhan’s first budget after his return was relatively calm and workmanlike, after expectations of tax hikes and spending cuts amid tough economic times.

He stressed the need to reaffirm the government’s commitment to close the gap between spending and revenue, implementing a plan for stronger economic growth and cooperation between government and the business sector.

Not everyone was convinced that the 2016 budget will strengthen the economic position in South Africa, though, and the rand weakened immediately after Gordhan’s budget was published.

Some commentators highlighted that the weaker rand was not only caused by Gordhan’s budget speech, but also by Moody’s decision to cut Brazil’s sovereign rating to junk.

Analysts and economists comment on weaker rand

The currency started the day somewhat firmer at R15.21/$, but gradually ran out of steam, dipping to as low as R15.66 by 16:17 earlier this afternoon. It also traded lower against other major currencies – at R17.11/€ and R21.69/£.

TreasuryOne felt that the rand’s almost 3% decline in daily trade was mainly as a result of Moody’s downgrading of Brazil, which it believes will record average negative growth for the next three years.

However, most analysts and economists felt the rand’s depreciation signalled a negative interpretation of Gordhan’s budget.

South Africa is also facing a downgrade to junk status, which happens when a ratings agency downgrades a country’s bonds to non-investment grade.

NKC analyst Bart Stemmet said Gordhan did not do enough to stave off a rating downgrade to junk bond status in the coming months.

“The steep exchange rate depreciation shortly after the budget was released suggests that the market agrees,” said Stemmet.

Overberg Asset Management director Brett Birkenstock said the markets are “questioning whether Gordhan has done or been allowed to do enough to avoid a downgrade”.

The graph below shows the rand vs the US dollar on 24 February.

rand dollar 24 Feb
Rand vs Dollar, 24 Feb 2016

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Rand takes a hit after budget speech