Dr Chris Harmse
Dr Chris Harmse

OPINION: Shocking Medium-Term Budget Policy affects rand and bonds, but shares rally

By Dr Chris Harmse Time of article published Nov 4, 2019

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JOHANNESBURG - The announcement by Finance Minister Tito Mboweni during his Medium-Term Budget Policy Statement that the South African economy is bound to grow by only 0.5percent shocked us all. 

He also emphasised that the budget deficit will reach 6percent of gross domestic product (GDP) and that government debt/GDP is likely to increase to 62percent.

The government will bail out Eskom with R26billion and the other state-owned enterprises with R11bn. These devastating facts had a profound effect on the rand exchange rate.

During last Wednesday and Thursday the currency had depreciated strongly from R14.62/$ to levels around R15.20/$ and quickly broke through the R19 level against the pound, and at one time traded at levels higher than R19.60.

The news that the US had lowered its interest rate by 25 basis points last Wednesday, as well as that the world’s biggest economy had grown by 1.9percent (expected 1.8percent) during the third quarter had positive effects on emerging markets.

These global developments, as well as the weaker rand, had a positive effect on most share prices on the JSE, with the exception of banking and financials. This increases negative perceptions that a possible lowering of the repo rate by the Monetary Policy Committee at the end of November is now no longer on the cards.

Given expectations that Moody’s will not grade South Africa’s sovereign debt to junk but only change its outlook from neutral to negative had started to influence the Rand exchange positive again on Friday and the currency traded at levels lower than R15/$ (14.97/$).

On the JSE the All Share Index (Alsi) had a very good week. The index closed Friday on 56650points. This was 1564points or 2.80percent higher than the previous week’s close. For the month of October the Alsi had gained 3percent.

The Resources 10 index had increased over the same time by 7.14percent. Financials also improved healthy over last month and had gained 2.83percent, whereas the industrial board gained only 0.19percent. Property continue to struggle, as listed property ended October down by -0.59percent.

This week all eyes will be on the reaction of the share, bond and foreign exchange markets on the announcement by Moody’s. 

Standard Bank will announce its Purchasers Managers Index for October tomorrow.

The South African Chamber of Industries (Sacci) will release its latest Sacci Business Confidence Index on Thursday. StatsSA will announce the Manufacturing Production Data, also on Thursday.

Most developed market economies will release their PMI’s for manufacturing, services and composite during October.

The US, China, Canada, the EU and most of its members will all release the important export and import numbers for October.

Dr Chris Harmse is an economist and chief investment officer.


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