The South African rand is trading slightly stronger on Wednesday (1 November) ahead of the medium-term budget policy statement.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
This has led to a significant shortfall versus the February budget, which economists estimate to be between R33 billion and R65 billion.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
“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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
The finance group also expects revenue under-collection of R50 billion for the current financial year.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
However, therein lies the risk to the rand.<\/p>\n\n\n\n
“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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
“The MTBPS is expected to provide an update on government\u2019s plans for Eskom\u2019s and Transnet\u2019s debt, with Transnet expected to need a bailout of R100 billion, placing pressure on government expenditure,” she said.<\/p>\n\n\n\n
“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\u2019s coal plants.”<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
By noon on Wednesday, the rand was trading at these levels against major currencies:<\/p>\n\n\n\n