South African Budget Gets Thumbs Up Before Rand Slips amid Dollar Bounce

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The Rand showed reslience in the wake of earlier gains as Finance Minister Tito Mboweni set out a 2021 budget plan that appeared to be given a thumbs up by the currency market on Wednesday, before a bounce in the U.S. Dollar led South African exchange rates to soften. 

South Africa's Rand was on its back foot toward the end of the European Wednesday while U.S. Dollars were bought as the North American Wednesday got underway, although the emerging market currency had held its own earlier when the ever-affable finance minister said "this is not an austerity budget."

"Today I want to leave you hopeful and outline how we will leave this economy in better shape for those who come after us," Mboweni told parliament. "We are on track to achieve our goal of closing the main budget primary deficit. We shall achieve a primary surplus on the main budget in 2024/25. This important achievement will coincide with the end of this sixth Parliament." 

 Source: South African Treasury. Budget speech by Finance Minister Tito Mboweni. 

Mboweni told parliament that government debt is expected to stabilise at 88.9 per cent of GDP in 2025/26 before declining thereafter, which is an improvement on the outlook as it stood at the time of October's medium-term budget plan last year. That earlier October 2020 outlook had envisaged debt-to-GDP topping out at 95.3% in 2025/26, which was also the point at which the primary budget balance was expected to move from deficit to surplus.

"The rand held steady through the entire speech," says Bianca Botes, an executive director at Citadel Global, a Pretoria-based treasury management service catering to corporates and private individuals. "Mboweni noted that the state of the deficit does remain dire and we are recording the biggest tax shortfall in SA’s history, which is obviously worrisome. The cost of debt is also growing rapidly, representing a risk factor."

Treasury has provided for total consolidated government spending of around R2 trillion (£96.6bn) each year over the period, the majority of which goes towards social services, while also coughing up around R10 billion for the purchase and delivery of vaccines over the next two years.

Total spending over the envisaged budget period is set to amount to around R6.2 trillion, with some R791.2 billion put aside for an infrastructure investment drive intended to renew and bolster the country's electricity supply.

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

There had been fears in some parts that plans for increased spending would lead to further credit rating downgrades that could raise the cost of finance and burden the South African Rand. South Africa lost its last 'investment grade' credit rating in March 2020, which had been awarded by Moody's, paving the way for exclusion from the FTSE World Government Bond Index that was previously known as the Citi World Government Bond Index. 

Further downgrades could yet materialise in the years if-not months ahead, but this week Mboweni managed to set out plans that at least appear to promise faster-than-anticipated progress in reducing the budget deficit and slowing the growth in debt-to-GDP hence the Rand's stability throughout the address. 

A transcript of the full budget speech can be found here, highlights of the budget plan are here while all of the related documents including the full budget plan are hosted on this part of Treasury's website. The Rand sold off during the European noon session as the U.S. Dollar rebounded broadly against many major developed and emerging world rivals, but the South African currency was more resilient to this Dollar comeback than other emerging market currencies. 

"USD/ZAR’s recent slide took it to its current February low at 14.4061 before recovering to the 55 day moving average at 14.9117. Further range trading around the moving average is expected to unfold over the coming days and weeks while 14.4061 underpins. This we believe to be the case since the February low has been accompanied by positive divergence on the daily RSI," says Axel Rudolph, a senior technical analyst at Commerzbank. 

Above: USD/ZAR at monthly intervals alongside Pound-to-Rand (blue line). USD/ZAR also bouncing from 55-month average