Sentiment towards SA economy brightens as Tito Mboweni charms market
CAPE TOWN – Investors cheered the government’s commitments to cut spending as an effort to contain the ballooning budget deficit as outlined by Finance Minister Tito Mboweni when delivering the 2020 National Budget Speech on Wednesday.
The deficit is forecast to expand 6.8 percent in 2020/2021 making it the highest in 28 years, according to FXTM analysts. Although rising debt remains a cause for concern, some relief was offered after the forecast for 2028 was lowered to 78 percent of gross domestic product (GDP) from the 81 percent projected in October.
The rand gained 0.5 percent as Finance Minister Tito Mboweni kicked off the Budget Speech with mention of tax cuts to the tune of R14bn. It was a massive surprise as market had expected hikes.
At 5pm the rand was bid 6 cents stronger than Tuesday's same-time bid at R15.44. To the pound the domestic unit was 14c firmer at R19.58 and to the euro the rand inched up 2c to R16.45.
Treasury partner at Peregrine Treasury Solutions Bianca Botes said this knee-jerk reaction was offset as the speech continued and the currency was trading back at R15.18 a dollar.
“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. While government is planning to slash the wage bill by R156bn over next three years, which will go a long way to ensure fiscal sustainability, the actual ability to effect this remains to be seen,” said Botes.
With regard to tax, senior research analyst at FXTM Lukman Otunuga said the reliefs for higher income earners came as an encouraging surprise and added to the positivity given how most were expecting the budget to dish out tax increase.
“It was no surprise that the 2020 growth forecast was cut from 1.2 percent to 0.9 percent, as many other major institutions are also predicting South Africa growth below 1 percent this year.
“A key takeaway from speech was Mboweni’s confidence that the 2020 budget will not warrant a Moody’s downgrade in March. This sense of hope over South Africa avoiding a credit downgrade has re-energised the rand,” said Otunuga.
Otunuga said the strengthening rand could send the currency pair towards R15 a dollar 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.