Newsletter Archive

Investor sentiment turns sour

Investors’ initial vote on the government’s Budget was positive with the rand firming and bond yields declining. But sentiment soon turned negative once the details and ramifications of National Treasury’s decisions were fully digested.

Initially the rand strengthened to R18.825 against the dollar, gaining almost half a percent on the perception that the Budget was better than expected and that the government had made the most of what is currently a difficult environment.

Raiding the Reserve Bank coffers

National Treasury’s decision to draw down the SA Reserve Bank’s foreign reserves account by R150 billion was initially received favourably because it reduces government’s borrowing requirements and alleviates pressure to raise taxes or reduce expenditure. However, the rand went on to fall to its weakest level since September 2023 as investors absorbed the news.

The foreign reserves account has built up paper profits of more than R500 billion as a result of the rand’s depreciation against the dollar since 2006. The R150 billion will be used solely to reduce the government’s funding liabilities, guided by a formal framework that is intended to prevent ad-hoc decisions and ensure transparency regarding the use of the funds.

However, the urgent need for these funds highlights the acute financial strains the government is experiencing and the delicate balance it needed to achieve in the Budget, in an election year. The prospect of the ANC losing its majority makes the ruling party loathe to cut back on spending and unwilling to get rid of the R33.6 billion expense of funding the R350 social grant.

Glass half full

There were positives for investors in the Budget though and these included:

• As expected, the Finance Minister did make reference to the National Health Insurance scheme, but he pointed to how much work needs to be done before it becomes a reality.
   
• National Treasury held firm on its commitment to not bailing out state owned enterprises, by not providing any support for Transnet.
   
• Local electric and hydrogen-powered car manufacturers received a tax incentive.
   

Glass half empty

The less obvious negatives for taxpayers were:

• Government’s decision not to move the tax bands in line with inflation, which means that taxpayers who get inflation-related salary increases move into higher tax brackets, a phenomenon known as bracket creep.
   
• Tax rebates and medical tax credits also weren’t adjusted for inflation.
   

Bottom line

The rand again proved to be the temperature gauge of investor sentiment, ultimately selling off on the news that the government will tap the central bank’s foreign reserve account. The stock market, meanwhile, was little affected by the annual update on the government’s financial position, gaining around 1% during the Budget week but not regaining the ground lost the previous week.