Concerns about deteriorating fiscal metrics in South Africa drove the markets to the red yesterday, with stocks on the JSE and the rand beginning the week trading lower.

The rand was 0.6% weaker at R18.99 to the US dollar while the JSE all share index slipped 0.2% to 73 506 index points by lunchtime as risk-on sentiment persisted, cutting two consecutive sessions of advances.

The domestic currency has been struggling to gain traction after dropping to below R19/$1 last week, hitting R19.10 to the greenback, its lowest level since the second week of December after being pressured by the ramping up of power cuts to Stage 6.

But investor focus is currently on the Budget review to be presented by Finance Minister Enoch Godongwana tomorrow amid signs of further deterioration of the fiscal position due to weak revenue performance.

The Budget will outline the government’s spending priorities, revenue collection strategies, and updated economic forecasts for the upcoming year.

TreasuryONE currency specialist Andre Cilliers yesterday said some things that will be mentioned were sluggish economic growth due to various internal challenges, including inadequate energy supply, deficient infrastructure in rail, ports, and water, and issues with safety, security, and education.

“Tax revenues are under strain as social expenditures continue to rise, and the need for bailouts for state-owned enterprises persists. The issue surrounding the gold and foreign exchange reserves will also likely be tabled,” Cilliers said.

“The market will watch the speech closely, and the potential is for the rand to weaken if fiscal consolidation is not adhered to.”

The markets are expecting the marked fiscal slippage of the Medium Term Budget Policy Statement (MTBPS), in November last year, if not worse, the rand has weakened.

Last year’s MTBPS saw gross debt was projected to peak at 77.7% of gross domestic product (GDP) in 2025/26, substantially higher than February 2023’s Budget estimate of 73.6% of GDP for the same year.

Additionally, the 2023/24 Budget deficit was revised weaker, at -4.9% of GDP in the MTBPS compared with -4.0% of GDP, further evidence of fiscal slippage, and the deteriorated budget deficit projections of later years won’t have improved substantially.

Investec chief economist Annabel Bishop said the rand has weakened as spending pressures have persisted.

Bishop said the markets worry about an even worse outcome, given 2024 is an election year and the ruling party was seeking to cling to power by making election promises which will place even greater expenditure pressure on the Budget finances.

She said financial markets react negatively to increased borrowings, particularly when expenditure does not slow to fit the deterioration in revenue, the case for a number of years for South Africa causing its bond yields to jump up, and credit ratings to fall.

“Financial markets also worry about greater populism creeping into the Budget, with polls showing the ANC is likely to lose its majority support in the elections and as a consequence go into coalition with smaller parties,” Bishop said.

“The Budget is expected to show plans to tap into South Africa’s Gold and Foreign Exchange Contingency Reserves Account (GFECRA), with a simple scope existing for transfers of some of the funds to the National Treasury.

“Worries centre around what the funds would be used for, i.e. higher public sector wages or other current expenditure, versus a more sensible reduction to debt, with strict transfer conditions.

“Using the GFECRA to reduce debt (at a maximum of less than 10%) would be a temporary measure in a weak economy, with debt likely to just creep up again, with SA’s debt of R5.2 trillion and the GFECRA cannot be quickly replenished.”

BUSINESS REPORT