October 24 2018

Here’s What Markets Made of South Africa’s Budget

Source: Bloomberg

South Africa’s rand snapped three days of gains and fell the most among emerging-market peers on Wednesday after Finance Minister Tito Mboweni blindsided markets with a speech in Cape Town that outlined higher fiscal deficits and warned that state revenue will continue to undershoot.

The currency was little changed as of 11:03 a.m. in Johannesburg, while the government’s benchmark rand bonds maturing in December 2026 dropped, with the yield climbing to an 11-month high of 9.38 percent.

Here’s the reaction from traders, analysts and economists:

Piotr Matys, analyst with Rabobank:

  • Mboweni’s budget was “the opposite of what the market was hoping” for
  • “It’s also a timely reminder that the country faces tremendous fiscal challenges amid weak economic activity constrained by structural issues”

Win Thin, strategist at Brown Brothers Harriman:

  • “I was clearly too optimistic that Mboweni would announce enough fiscal tightening to keep the ratings agencies at bay”
  • “Risks of downgrades have gone up significantly”

Bernd Berg, strategist at Woodman Asset Management:

  • “South Africa remains stuck in a low growth, high-debt environment and it is difficult to get euphoric about the outlook for the rand at this juncture”
  • “With little positive domestic drivers and a challenging external environment, especially for South Africa’s main export partner China, it is hard to see the ZAR outperform its EM peers in the short run”

Razia Khan, chief Africa economist at Standard Chartered:

  • “The initial, knee-jerk reaction of the market to the budget was understandably negative” and investors started to price in less benign ratings reviews
  • Still, “we believe that the tax-buoyancy assumptions in the medium term are deliberately conservative”
  • “Even the revenue ‘miss’ in the current year is arguably due more to VAT rebates -- a good thing, which ultimately strengthens tax compliance -- rather than just the growth slowdown”
  • “Although the higher debt path outlined may trigger some concern, this is no justification for a downgrade in itself” from Moody’s

Hans Gustafson, strategist at Swedbank

  • It will be a “very challenging” for South Africa with “a higher borrowing requirement in an environment with tight U.S. liquidity and weaker growth globally”
  • “The rand needs to incorporate a higher risk premium”

Mehul Daya, analyst at Nedbank:

  • It’s a “double whammy” for the rand and local-currency bonds as the budget was disappointing and a weaker euro is strengthening the dollar
  • This means South African assets face internal as well as external headwinds

Kevin Daly, money manager with Aberdeen Standard Investments:

  • South Africa’s budget was “somewhat of a disappointment” given that the deficit target for 2018-19 was increased to 4 percent from around 3.5 percent
  • “But we don’t think this is enough to prompt action by Moody’s to change the outlook to negative”

Marek Drimal, analyst at Societe Generale:

  • “The headline figures are discouraging, but they will not necessarily lead to a Moody’s downgrade to non-investment grade”
  • “That being said, South Africa is facing a prolonged period of weak growth, elevated inflation, sizeable current-account deficits, and longer-term risks of a downgrade”
  • Reserve Bank should raise rates in November
  • Rand will probably fall to 16 per dollar by the end of the year and 17 by the end of September 2019
  • The land-reform debate will “periodically stress financial markets”