Jittery rand anticipates Mboweni signal

JOHANNESBURG – The rand yesterday weakened further as investors stood on the sidelines and shifted their focus on today’s Budget and how the government will assist ailing state-owned entities (SOEs) without compromising the fiscal consolidation path. 

The local unit depreciated to an intra-day low of R14.21 against the dollar as Finance Minister Tito Mboweni prepared to present his first Budget speech in the midst of a deteriorating fiscal outlook.

André Botha, a senior dealer at TreasuryONE, said: “Markets are waiting in anticipation of the Budget speech in order to ascertain how Mboweni will balance the books and how he will handle Eskom and the other SOEs.”

Ratings agency Moody’s, which is the last of the three big ratings agencies to leave South Africa’s credit rating at investment grade level, is expected to provide its rating review on the country next month after it had digested the contents of the Budget.

Steven Nathan, the chief executive of 10X Investments, said Mboweni would have to walk a tightrope between being right and being popular. “It appears Moody’s is reluctant to drop the sword on our investment grade rating, because condemning our local government debt to junk status could flatten the rand, ignite inflation and strangle our economy. But at some point, it may have no other choice.” 

Lukman Otunuga, a research analyst at FXTM, said markets would be watching to see whether the Budget statement expressed concern over the global economic environment and impacts it could have on the South African economy.

He said the local currency was also hamstrung by the latest round of trade talks between the US and China set to resume in Washington tomorrow.

“Appetite towards the local currency and other emerging market currencies was impacted by caution ahead of the US-China trade talks in Washington this week.”

Officials from Washington and Beijing met last week in the Chinese capital for trade negotiations.

Mboweni’s frank maiden Medium-Term Budget policy statement in October showed an economy at the crossroads and facing a debt trap.

Estimates from the National Treasury at the time showed that the cost of financing the government’s debt would now exceed the budget by R7.9 billion in the 2020/21 financial year. Mboweni further warned that gross debt would only stabilise to 59.6 percent of the growth domestic product in 2024/25 against the previously projected 56.2 percent in February 2018.

Analysts expect that revenue shortfall could amount to about R5bn to R10bn in the current fiscal year.

President Cyril Ramaphosa in his State of the Nation Address earlier this month said Eskom would receive further financial support from the central government.

Allan Gray portfolio manager Sandy McGregor said that faced with sky-high debt, a stagnant economy and disappointing tax collections, South Africa was on an unsustainable fiscal path. “One of the great disappointments of 2017 and 2018 has been the economy’s failure to escape from its current stagnation despite strong synchronised global growth,” he said.

“Given that there are increasing signs that the world economy is now slowing, it is difficult to be more optimistic than the Treasury about economic growth in 2019, or to expect better than its cautious revenue projections.”


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