Rédaction Africa Links 24 with Ed Stoddard
Published on 2024-02-21 15:37:54
The South African Budget speech is always closely watched by the markets, as it directly impacts the country’s financial outlook. The initial reaction from forex and bond traders, as well as the institutions they represent, is a key indicator of the credibility of the budget. If the market is not convinced of the budget’s credibility, the rand will quickly weaken and bond yields will rise.
In this case, the Budget presented by Godongwana was seen as reasonably credible, as evidenced by the immediate strengthening of the rand and a decrease in bond yields. The rand strengthened from 18.91 to 18.82 against the dollar, while yields on the 10-year government bond fell almost seven basis points to 9.988%. These reactions suggest that the Budget was viewed positively, although not without its concerns.
Analysts and economists reacted cautiously positive to the Budget, acknowledging that South Africa’s fiscal situation is fragile, but noting that it was in a slightly better position than before. The major highlight of the Budget was the announcement that R150 billion would be drawn from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) of the South African Reserve Bank (Sarb) over the next three years. This money will be used to lower debt issuance and help contain the growing pile of debt burdening South Africa’s slow-growth economy.
Razia Khan, Chief Africa Economist at Standard Chartered Bank, highlighted the positive market reaction to the Budget, emphasizing that the use of the GFECRA would yield debt service savings and reassure near-term funding needs. However, Khan also noted that there was no announcement of an all-encompassing fiscal anchor and no equity injection for Transnet, despite increased social spending.
Peter Attard Montalto, managing director at Intellidex, expressed surprise at the Budget, noting that the National Treasury had confounded overly negative market expectations. While the Budget was a positive surprise, Montalto acknowledged that there were still deep problems related to the narrow tax base and spending challenges.
Jee-A van der Linde, senior economist at Oxford Economics Africa, also expressed caution, stating that while the Budget mitigated fiscal risks in the medium term, South Africa’s fiscal risks had not diminished. The decision to tap into the GFECRA’s valuation gains while delaying the Transnet matter raised concerns about misspending and compromised state finances.
In conclusion, the initial market reaction to the South African Budget was relatively positive, with the rand strengthening and bond yields falling. However, analysts and economists cautioned that while the Budget addressed some immediate concerns, there were still underlying issues related to fiscal risks and misspending that needed to be resolved. The use of the GFECRA to lower debt issuance was seen as a positive step, but concerns about the narrow tax base and spending challenges remained.
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