Mid-term budget speech scored by the rand

The rand reflects an underwhelming budget statement and likely ratings downgrade.

Within minutes of the Finance Minister, Malusi Gigaba’s Mid Term Budget statement release, the currency market expressed its disappointment (disapproval) therein. Evidencing this is the rand, which has now given up more than 3% against the US Dollar, 3.5% against the Euro and 4% against the British pound.

The budget deficit for South Africa has been revised significantly higher for 2017/18, to 4.3% of GDP (from 3.4% previously).  Gross debt for the country is expected to rise to a massive 60.8% by 2021/22 and the costs of repaying this debt are expected to amount of 15% of revenue by the end of the Medium term Expenditure framework (METF). The debt repayment costs would then be the largest item in the budget.

The fragile state of state owned enterprises (SOEs), most significantly South African Airways (SAA) and the South African Post Office (SAPO), continues to weigh on the economy. Treasury is looking to sell around R4bn of Telkom shares to help fund the ailing businesses. The share sale will be to the Public Investment Corporation (PIC) with an option to buy the shares back at a later stage (seemingly very unlikely). Unfortunately whilst recognising the ill state of SOE’s, as well as a likely continuation of ongoing funding being needed for these businesses to operate, there is still little in the way of plans to remedy the issues at hand.

Further ratings downgrades appear imminent. Fiscal consolidation, the health of SOE’s and maintaining the expenditure ceiling are some of the key factors ratings agencies are watching at the moment. If the aforementioned factors were a three point scoring system for the likes of Moody’s and Standard & Poor’s rating agencies, the unfortunate truth is, the scorecard would have a zero reading. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.