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The Budget Speech and the Ukraine - mixed results

Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Mutiversity. Photo: File

Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Mutiversity. Photo: File

Published Feb 28, 2022

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THE FAR better-than-expected National Budget, delivered by the Minister of Finance Enoch Godongwana last week, and the aggressive invasion of the Ukraine by the Russian military has led to big volatile movements, especially in commodity prices and the rand exchange rate and equity prices around the world.

The rand dipped under R15.00 to the dollar (R14.93/$) just after the budget speech last Wednesday, to trade more than 60 cents weaker on Thursday at levels around R15.60. The currency closed on Friday evening in New York much stronger on R15.33.

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The same tendency appeared for the gold, platinum and palladium prices. The gold price traded at one stage on $1 912 (R28 861) on Thursday, but as markets started to calm down from the initial shock of the Russian invasion, the precious metal traded lower on Friday around $1 889.

Brent oil also remains in volatile trading on R94/$ per barrel last Tuesday, just to shoot up strongly to $106 per barrel on Thursday and subsided strongly, trading on R97.25/$ on Friday afternoon.

On the JSE, shares, although quite volatile recovered strongly on Friday after the big “Ukraine” sell-off on Thursday. The all share index ended Friday on 74 205 points up by more than 500 points, or 0.72 percent, on the day. Although the index traded 2.4 percent lower than the previous Friday it is still 0.7 percent higher than the beginning of the year.

This is in sharp contrast with most indices in developed market economies (DM).

On Wall Street for instance, the Dow traded on Friday 7.5 percent lower than the beginning of the year, the S&P 500 index was down 9.2 percent for the year and the Nasdaq lost a massive 12.1 percent since December 31, 2021.

The “stronger” movement in share prices on the JSE was mostly due to commodity prices and financial shares. The Resources 10 index closed Friday for the week and already had gained 11.9 percent for the year. The Financial 15 index traded -1.5 percent lower on Friday than the previous week, but is already 7.1 percent higher over the year-to-date. Industrial shares and listed property however show the same tendency than DM indices. The Industrial25 board is now - 9.9 percent and listed property (SAPI) -6.4 percent down since December 31 .

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Godongwana delivered one of the most positive budget speeches since 1994. He surprised most economist, analysts, politicians, the press and the public. The general feeling was that apart from sin taxes (that always will be increased) most people expected some form of tax increase and definitely at least an increase in the Road Accident levy Fund and a strong possibility of an increase in income tax in the form of some welfare tax level.

The opposite happened and the Minister almost gave the perfect budget for the current South Africa. He almost did the impossible and addresses most of the burning issues like lowering both the government’s deficit to gross domestic product (GDP) from 5.7 percent in 2021/22 to 4.2 percent in 2024/25.

Of note:

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– Decreasing government debt to GDP from the projected 78.1 percent tabled in the Medium-Term Budget Speech to 75.1 percent and much more than the 81 percent projected in last year’s budget.

– Projects to realise a primary fiscal surplus – where revenue exceeds non-interest expenditure – by 2023/24.

– Lowering income taxes via bracket creep and cut company taxes from 28 percent to 27 percent.

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– No increase in the fuel tax or the Road Accident levy.

The Minister could introduce these measures given the R186 billion increase above projected revenue received through SA Revenue Service (Sars). This “injection” can be attributed to the global commodity boom (R86 billion) and the rest by the improved tax collection effort by Sars. This target could be reached despite the lower economic growth rate of 4.8 percent, from 5.1 percent predicted in the “mini budget” .

This coming week domestically the new car sales number for March will be released on Tuesday. The HIS Markit Purchasers Managers Index (PMI) for February will be announced on Thursday. On global markets the release of the US non-Farm payrolls on Friday will dominate sentiment for equity prices and exchange rates. Most countries will release their various PMI figures and economies like India, Italy, Australia the European Union will release its job numbers for January on Thursday.

Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Mutiversity.

BUSINESS REPORT ONLINE

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