South African Rand Threads the Needle

Above: File image of Enoch Godongwana, copyright Pound Sterling Live, Still Source: SABC News.

ZAR recovery says new budget to pass parliament.

The Rand weakened into this week's budget announcement, but the subsequent recovery confirms that markets expect Finance Minister Enoch Godongwana to thread a needle and pull the governing coalition together.

Fissures emerged in the Government of National Unity (GNU) over the ANC's proposal to raise value-added tax (VAT) by 2% in an initial budget, first aired in February.

The rand fell ahead of the revised budget presentation, which was made midweek, reflecting fears of further rancour.

"Political dynamics have become more combative lately: further disputes in the GNU could act as a roadblock to ZAR strength," says a note from UBS.

"The budget is facing opposition from several parties, including the Democratic Alliance, leading to market concerns about the stability of the coalition government and causing the ZAR to weaken," says Eirini Tsekeridou, Fixed Income Research analyst at Julius Baer.

The VAT hike is whittled down to 1%, but governing partners in the DA still won't give the budget full backing.

But markets sense posturing ahead of an agreement, and ZAR is rising into the weekend: the USD/ZAR is half a percent lower on the day at 18.21, and GBP/ZAR is down by a similar margin at 23.55.

Annabel Bishop, economist at Investec, says in its existing form, the budget is not a game changer for financial markets.

She explains that it presents near-term fiscal slippage with a weakening in government’s debt to GDP projections and fiscal deficits, but then a continuation of previous projections’ moves to fiscal consolidation.

Gross debt is consequently now projected to stabilise at 76.2% of GDP in 2025/26, up from a previous Treasury estimate at 75.5% in 2025/26.

"The Budget is credit neutral," says Bishop, "with modest fiscal slippage only in the short-term and fiscal consolidation longer-term, maintaining a primary balance."

"Overall, it is an unsurprising budget from a financial market perspective," she adds.

For the Rand, it looks as though the outlook will remain heavily depdendent on global developments and the evolution of the USD under an expected U.S. economic slowdown.