Rand firms on hopes for fiscal prudence

Finance Minister Nhlanhla Nene. Picture: Sam Clark

Finance Minister Nhlanhla Nene. Picture: Sam Clark

Published Oct 22, 2014

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The rand on Tuesday strengthened below R11 against the US dollar ahead of Finance Minister Nhlanhla Nene’s first medium-term budget policy statement to Parliament on Wednesday.

Analysts said the market was betting that Nene would reassure investors that South Africa would stick to fiscal prudence by containing expenditure while working to spur growth.

But if Nene provided no credible plan to narrow the budget and current account deficits, the strength in the rand could be short-lived.

Another factor that helped the rand edge up to its strongest intraday level since mid-September was the news of stronger-than-expected GDP data from South Africa’s key commodity importer, China. During the day it hit R10.96.

Nene is expected to target a budget deficit of 4.4 percent of gross domestic product for the 2014/15 fiscal year, according to a Reuters poll.

The Treasury’s initial forecast was for 4 percent. This prospect is a worry for credit-rating agencies but they might be reassured if Nene is able to counter it with a clear and consistent message that spending will be reined in.

Government debt was also bid higher, pushing the yield for the 2026 secondary market benchmark 5 basis points lower to 8.025 percent.

“Today has seen a minor push back into risky assets with local government bonds the recipient of some investment capital and this filtered through into a rather blasé rand market,” Standard Bank trader Inshaan Omar said.

Nene, who was promoted in May after serving as deputy to Pravin Gordhan, may use his first mid-term budget to announce something the government has been loath to try for years: selling assets to plug funding holes in the embattled power utility and elsewhere.

“Nene could announce the complete or partial privatisation of some assets, which would mean a smaller liability for government,” Maarten Ackerman, an investment strategist at Citadel Asset Management, said yesterday. “Then, on paper, he would be able to put down numbers which will keep the rating agencies happy.”

Other positive news came from the Reserve Bank’s leading indicator yesterday, up 0.8 percent in August, showing that the economy is picking up. This was the leading indicator’s best level since February.

This was due to an increase in the number of building plans passed and higher volumes in manufacturing orders.

Azar Jammine, chief economist at Econometrix, said the positive outcome for the leading indicator confirmed the economy was resuming modest growth in the aftermath of all the debilitating industrial action in the first seven months of the year.

He said what was especially encouraging was the fact that the main drivers of the improvement in the indicator related to developments in domestic real economic activity rather than financial indicators or global economic growth indicators.

“The inferences to draw is that economic growth should see some improvement to well over 2 percent in 2015, off a very low base for 2014, other things being equal,” he said.

Jammine said unfortunately there was one huge cloud on this horizon, the possibility of a strike in the public sector in the face of exorbitant wage demands. - With additional reporting by Bloomberg and Reuters

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