Yesterday’s budget was disappointing. What was needed was a budget that would help attract foreign capital to SA shores. Instead, we got an evolution of what we had witnessed on several occasions before, and it missed the mark. The objective of reducing the budget deficit and consolidating the budget is not convincing; it lacks any growth stimulus, and it is unclear how this government thinks that lifting the tax burden on the private sector will help attract foreign investment. SA is a capital-scarce country with a drastic deficiency in gross fixed capital formation and savings. There is very little in this budget that changes that. All that to say the budget lacked the bold reforms needed to get SA on a more sustainable fiscal trajectory. Signs that the government is moving away from the ideology that got SA in fiscal trouble in the first place were few and far between. Increased social spending continues to be viewed as a triumph of a developmental state, while bloated public sector wage agreements remain in place.
As for the tax increase, the government should have focussed on reducing wasteful expenditure before approaching the tax base with an increased burden. Raising taxes on an overburdened tax base carries significant risk. In this case, the higher VAT rate may not generate the necessary revenue as it will weigh on consumption and growth. Moreover, the authorities are exploring various wealth taxes to further tap into the resources of higher-income groups. However, this too is a dangerous game as this is the same segment of the population that controls much of the capital investment into the economy on which the country will become more, not less dependent if any rejuvenation of the economy is targeted.
Then, there are still questions about whether the budget will pass through parliament in the coming months with all the big parties – barring the IFP – opposed to the proposed VAT increase. Investors will also be very curious about how the GNU is going to frame yesterday’s events. Recall that after the postponement in February, there was a concerted effort by GNU parties to highlight that the coalition was still healthy.
ZAR Markets
The market’s reaction to yesterday’s budget has not been positive. The ZAR is trading on the back foot and looks increasingly unlikely to add to last week’s advance. Instead, it may trade back towards its previous rangebound pivot around R18.5000/$, failing to take full advantage of the USD’s broader decline. It remains uncertain whether the ANC will be able to pass the budget, meaning the markets will face continued volatility in the coming weeks and months. The ZAR does not need this kind of uncertainty at a time when global equities are becoming more fragile, which puts the ZAR’s slow recovery trend at risk. All in all, the ZAR looks set to drift back towards its early-year trading range in the coming days, after which controlled volatility within a familiar channel looks likely.
Global FX Markets
The dollar index was slightly bid yesterday despite a slightly softer-than-expected CPI reading, which showed that US inflation slowed to 2,8% y/y while core inflation dropped to 3,1%. After some recent sharp declines, the dollar index is seemingly bottoming out, at least for now, with the global environment still looking very uncertain. Trump’s trade flip-flops continue, while concerns over the US economy’s outlook continue to grow. The euro remains on the front foot against the USD, with German yields continuing to rise. Given the pace of the recent gains for the common currency, we expect that momentum should begin to slow, especially with uncertainty surrounding the trade outlook now that the EU has announced retaliatory tariffs against the US. A trade war will negatively impact growth and turn into a drag on the EUR/USD. The pair remains above EUR/USD1.0890 heading into the European session today. Yesterday, the GBP/USD headed toward GBP/USD1.3000 following the US CPI data, which pressured the USD. The recent rally for sterling has taken the GBP/USD’s Relative Strength index into overbought territory, suggesting that a near-term correction may be due. The last time the RSI hit overbought was in Sep 2024, with sterling suffering a major slump soon after. This time around, however, any correction lower will be a healthy one, given the shift in the outlook for the UK versus the US. The USD/JPY is hovering just above the USD/JPY148.00 handle this morning, with investors monitoring their delta hedging requirements with $1.3bn worth of options at a strike of 148 expiring today. Meanwhile, we have near-term implied vol elvels rising as traders grow a bit uncertain given the newest developments on the US tariff front. However, risk reversals show that the premium remains to hedge against USD/JPY downside.