Rand gains ground against the dollar after fiscal consolidation in Budget
JOHANNESBURG – The rand firmed 0.7 percent to R15.14 on Wednesday as investors cheered the government’s commitments to rein in spending in an effort to contain the ballooning Budget deficit.
The local currency recovered slightly from trading at R15.25 against the dollar before Finance Minister Tito Mboweni’s Budget Speech to exchange hands at R15.14 by 5pm.
Analysts said Mboweni’s fiscal consolidation had been received well by the markets. They said Mboweni’s cost-cutting reforms would likely preserve South Africa’s last remaining investment grade status by Moody’s.
FXTM’s senior research analyst Lukman Otunuga said sentiment towards the economy brightened slightly after Mboweni’s speech. Otunuga said a key takeaway was Mboweni’s confidence that the 2020 Budget would not warrant a Moody’s downgrade in March.
“This sense of hope over South Africa avoiding a credit downgrade has re-energised the rand, with the local currency appreciating roughly 0.7 percent against the dollar and G10 majors,” he said.
“A strengthening rand could send the currency pair towards R15/$ in the near term. Given how coronavirus fears and global growth concerns continue to fuel risk aversion, it is likely the rand’s upside will face multiple obstacles down the road.”
The rand had weakened ahead of the Budget on fears that taxation would be substantially increased, thus stifling growth.
But Mboweni unexpectedly announced a range of relief measures, with tax cuts of R14 billion, catching the market by surprise. Mboweni also announced R261bn in baseline spending reductions in an array of cost-cutting measures, including a R160.2bn reduction in the public sector wage bill over the next three years.
He said the economic outlook would remain weak as real gross domestic product (GDP) was expected to grow at 0.9 percent in 2020, while public finances would continue to deteriorate.
Peregrine Treasury Solutions’ Bianca Botes, said though the rand closed slightly firmer on Budget Speech, the reality has still to set in.
“South Africa’s fiscal situation remains dire, however, as the deficit widens to its highest level in 18 years, while the debt-to-GDP ratio is set to rise to 71 percent,” Botes said.
“While the government is planning to slash the wage bill by R156bn over the next three years, which will go a long way to ensure fiscal sustainability, the actual ability to effect this remains to be seen.”
Mboweni said the government had tabled an agenda item on the management of the public-service wage bill at the Public Service Co-ordinating Bargaining Council and had commenced discussions with unions to achieve the required reduction.
Old Mutual Investment Group chief economist Johann Els said the proposed wage bill spending cuts, however, remained a risk as these still needed to be negotiated with unions.
Els said the rising debt ratio and weak economic growth would likely lead to a ratings downgrade by Moody’s this year, most likely in March.
“This is my base case. The risk is that they wait till November to see if the wage bill reductions can realistically be achieved,” Els said.