South African Rand Outperforms as Budget Looms but 14.40-to-15.40 Range Seen Holding

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• GBP/ZAR spot rate at time of writing: 20.54
• Bank transfer rate (indicative guide): 19.81-19.96
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The Rand outperformed on Tuesday with gains over many contemporaries even as developed world bond yields surged and global stocks came apart at the seams, although analysts say the recent 14.40-to-15.40 range is likely to dominate for USD/ZAR through Wednesday's budget. 

South Africa's Rand was higher against all major developed market currencies including a resurgent U.S. Dollar and a strong Pound Sterling, but lower against some of its largest emerging world counterparts including the Mexican Peso, Russian Rouble, Indonesian Rupiah and Chinese Yuan.  

The Rand's resilient performance was unusual given the international environment, which saw stock markets fall sharply in Europe and North America, with losses for the S&P 500 and Germany's DAX index both surpassing -1% in light of a continued sell-off in developed world bond markets. 

This bond market rout comes ahead of Wednesday's 2021 South African budget, which is likely to be a crucial determinant of investors' appetite for the Rand going forward.

"We had South Africa Unemployment earlier today released at 32.50%, which is almost 2 pts higher than Q3 2020. Otherwise, focus turns to tomorrow’s Budget," says Rui Ding, content lead at Citi FX Wire. "We see 14.90/15.00 as a first resistance with a risk of testing 15.40 if the level gives way."

The Citi FX team says the 14.40-14.50 area should remain a strong support for USD/ZAR over the coming days, and a ceiling for the Rand itself.

Above: USD/ZAR shown at hourly intervals alongside Pound-to-Rand rate (blue line).

Investors' perceptions of Wednesday's budget, set to be unveiled by Finance Minister Tito Mboweni in parliament around 12:00 London time on Wednesday, and its impact on Treasury's creditworthiness may be instructive of whether USD/ZAR tests the bottom of its range next or the top of it.

"The rand strengthened late yesterday in anticipation, to R14.68/USD from a weak point of R14.93/USD earlier in the day, but is likely to remain volatile

"With South Africa potentially seeing some slight lowering in its debt trajectory, markets are prepared to view tomorrow’s Budget outcome positively, particularly in light of the risk-on towards EM portfolio assets still in favour from global financial market investors," says Annabel Bishop, chief economist at Investec. ""Indeed, with the rand, in part, strengthening ahead of time on this anticipation of improved fiscal consolidation plans in the Budget, there is room for disappointment, as well as the option of weakening on the fact, which often occurs in financial markets, absent any countervailing market moving forces."

The fiscal update has hung over the Rand like a Sword of Damocles given market fears that it could lead to further credit rating downgrades, although recently tax receipts flowing into the Treasury have improved during recent months, which creates scope for a positive surprise on budget deficit and debt-to-GDP forecasts this Wednesday.

Mboweni said in October that South African debt-to-GDP is likely to top out at 95.3% in 2025/26, later than previously forecast, which is also the delayed point at which the optimistic minister hoped to deliver a primary budget surplus. Keeping South Africa on course for a balanced budget may be key to its rating prospects, although Mboweni faces a delicate and invariably difficult task because spending cuts and tax increases could act as near-term headwinds for the already-embattled economy.

Above: USD/ZAR shown at daily intervals alongside Pound-to-Rand rate (blue line).

"The better-than-expected performance in YTD tax collection suggests that revenue could be about R100bn higher in FY20/21 relative to the NT’s MTBPS estimate. This improvement bodes well for the revenue outlook," says Mpho Molopyane, an economist at Rand Merchant Bank. "We anticipate expenditure slippage of R14bn from higher debtservice costs and additional SOE funding. Over the remainder of the MTEF, we do not believe that the NT will be able to deliver on a wage freeze, and that non-interest expenditure will be R74.2bn higher over 2021/22 to 2023/24 relative to the MTBPS." 

South Africa was stripped of its last remaining ‘investment grade’ credit rating in March 2020, rendering it a ‘junk’ borrower in a decision that preemptively weighed on the Rand for months beforehand. But given pandemic-related borrowing, many economists and analysts fear that further downgrades could yet be seen in the absence of public sector wage freezes and measures designed to pull in higher tax receipts.

This would lead to higher bond yields and financing costs as well as potentially increased inflation and interest rates further down the line. But so far South African tax receipts have come in stronger than was anticipated by the market, although local analysts are doubtful that the government will be able to surprise as positively when it comes to keeping a lid on the public sector wage bill. Wednesday's budget will shed light on plans in relation to this and other areas. 

"The worst-case scenario we foresee would be if government and labour unions reached a deal that required wages to keep pace with inflation for all employees," says Kim Silberman, a currency analyst at RMB. "Despite the improvement in the fiscal outlook, issues of debt sustainability continue to linger as the primary balance is projected to remain in deficit, while the interest rate on government debt is expected to remain higher than nominal GDP growth, implying the debt-to-GDP trajectory will continue to rise."