Today’s National Budget marks the first under the GNU, where balancing ideological differences will be a challenge. Budgeting under a coalition government is unlikely to bring a complete ideological shift but will require compromise. The budget must either align with the government’s ambitious growth agenda – potentially increasing debt – or demand greater efficiency from ministers within tighter constraints. However, rising debt levels more broadly necessitate a more conservative fiscal approach, requiring either spending cuts, tax increases, higher growth, or a mix of these.
Investors will welcome signs that South Africa is moving toward breaking up government monopolies, as seen with Eskom, given the deep market imbalances caused by SOE dominance. Another key focus will be the government’s approach to fixing local governance failures, an issue highlighted in President Ramaphosa’s SONA. Poor administration has led to weak infrastructure investment and failing service delivery, with only 13% of municipalities receiving clean audits, according to the Auditor General. Finally, mounting debt is a massive concern, with servicing costs exceeding 20% of total revenue and crowding out essential growth investments. To address these challenges, difficult trade-offs will be necessary. Ideally, these will include spending cuts and the liberalisation of network industries to enhance efficiency and drive economic momentum.
Of particular importance for markets will be the forecasts National Treasury puts forward. Finance Minister Godongwana is expected to present a bold yet familiar fiscal outlook, with key parameters largely in line with previous projections. However, National Treasury has a track record of overestimating growth and underestimating risks to tax revenues. As a result, forecasts of a narrowing fiscal deficit may be overly optimistic, especially given rising global growth risks. Historically, this pattern has contributed to South Africa’s increasing debt burden over the last business cycle, as actual deficits have tended to exceed projections.
ZAR Markets
The ZAR remains in a tight range ahead of today’s budget speech, trading around R18.4000/$ this morning. In terms of fiscal consolidation, the government has been kicking the can down the road for some time now, but it is quickly running out of road to avoid a catastrophic fiscal event. A credible commitment to structural and fiscal reforms will be crucial in maintaining the positive sentiment that followed the GNU’s formation and supported ZAR resilience. Anything short of that could weigh on investor sentiment towards SA and hurt the ZAR. That being said, Minister Godongwana and Co. are skilled at maintaining positive optics around SA’s reform narrative, but they are walking a fine line as eventually, material reforms are needed.
Global FX Markets
The greenback traded firmer yesterday against a basket of currencies with investors rotating to the dollar as geopolitical uncertainty drove risk off trading conditions. Equally uncertain is the path of US rate cuts with many policy makers pointing to the potential inflationary conditions likely to be generated by Trump’s trade policies. Today’s release of the Fed minutes will give further insight into the Fed’s outlook and potential path going forward. The USD index is currently marking time at 107.01 ahead of the EU open. The euro is currently holding just below the EUR/USD1.0450 mark as we enter the start of the EU session this morning. No tier-one out of the EZ will leave the currency to ebb and flow with the prevailing sentiment towards the region more broadly. The big concern currently is the fact that the EZ has been left out of the US, Russia peace talks and what this ultimately means from a geopolitical perspective. The British pound eased slightly on Tuesday but remained near recent two-month highs as data showed accelerating wage growth in the UK. Private-sector wages, excluding bonuses, rose by 6.2% year-on-year, the fastest pace in a year, complicating the Bank of England’s (BoE) plans for interest rate cuts. Despite a weak economy, the sustained wage pressures suggest the BoE may take a cautious approach to rate cuts. Investors slightly reduced their rate-cut expectations, now pricing in 58 basis points of easing for the year. BoE Governor Andrew Bailey stated that the latest jobs data does not alter the bank’s broader economic outlook. Markets now focus on UK inflation data due today, which analysts expect to provide clearer insights into future policy moves. The yen is pivoting around the USD/JPY152.00 level this morning consolidating following the recent volatility. USD/JPY151.00 still providing support as the week matures. Not much to report back on today.