Sense of unease and anxiety ahead of the Budget hits the rand
The rand retracted against every G10 currency as a sense of unease and anxiety mounted ahead of the Budget.
Analysts said the speech would provide guidance on whether the government had been able to rein in spending and introduce fundamental macroeconomic reforms that could revive the country’s economy.
FXTM senior research analyst Lukman Otunuga said the question on investors’ minds was whether Mboweni would be able to convince Moody’s that he had a reliable plan to stabilise government debt.
“Whatever the outcome of the Budget speech, it will certainly have a lasting impact on the South African rand and the country’s economic outlook,” Otunuga said.
“If the speech disappoints and fear intensifies over a credit downgrade by Moody’s at the end of March, the rand will be in the direct firing line.”
Moody’s is the only major international ratings agency that still has South Africa’s sovereign debt above investment grade. The much-anticipated Budget comes amid declining business activity in South Africa.
Yesterday, the SA Reserve Bank’s composite leading business cycle indicator declined 0.3 percent in December and contracted for the 13th consecutive month year-on-year.
The bank said the largest negative contributors to the movement were a decrease in the number of approved residential building plans and a decrease in the average number of hours worked in the manufacturing sector.
It said December was the worst month for the manufacturing sector, as production fell by 5.9 percent due to unprecedented Stage 6 load shedding.
On Monday, the JSE experienced its biggest decline since the 2008 global financial crisis. The country is faced with the longest economic downswing since 1945, while government debt has ballooned from 26 percent in 2008 to 56 percent in 2019.
Mboweni is expected to announce the implementation of the National Treasury’s strategy to revive the economy as growth is expected to be about 0.5 percent. He is also expected to reveal measures to address the electricity and fiscal crises, and rein in expenditure by cash-strapped state-owned enterprises.
Moody’s has flagged that it was unsustainable for South Africa to use borrowings to supplement its servicing of current expenditure, including debt servicing costs. The ratings agency is expected to announce its decision on the country’s review at the end of March.
Investec chief economist Annabel Bishop said the decline in the leading indicator pointed to a likely weakened gross domestic product in the first quarter of 2020. Bishop said the failure of the government to curtail its expenditure would dramatically worsen the country’s already weak economic outlook, erode business and consumer confidence and affect investments.
She said hikes in value-added tax or income tax would worsen the growth outlook for South Africa.
“Hiking taxes instead of cutting expenditure, and so the debt trajectory, would negatively impact consumers, and so corporates facing these consumers retailers, risking higher unemployment,” Bishop said. “The net effect would be for a further dwindling in real disposable after tax income growth, which has been a key driver for the slowdown in economic growth in South Africa.”