Johannesburg - Rand losses on Tuesday could be extended, according to I-Net Bridge citing an unnamed currency trader. He was commenting in the wake of government plans to relax exchange control regulations.
"We have softened as it is clear that government wants to weaken the rand by doing away with exchange controls," the trader told news agency I-Net Bridge. "Once we break 7.65 against the dollar, we could break 7.75." On Tuesday the rand was trading at R7.69/$1 in the late afternoon.
Finance Minister Pravin Gordhan said in his Medium-Term Budget Policy Statement (MTBPS) that the ministry would remove the so-called 180 day rule requiring companies to convert their forex into rands in that time.
The rule had contributed to rand volatility in the past. Another reform of exchange controls was the doubling of foreign capital allowances to R4m for individuals.
Other aspects of the MTBPS that raised eyebrows was the size of the fiscal deficit, forecast at 7.6% of gross domestic product (GDP) this year. That's because fiscal gaps of over 3% of GDP are generally considered to be high.
The counter argument, however, is that the public sector needed to maintain spending, despite anaemic tax revenues, to stimulate the sluggish economy.
"These times require we borrow more extensively," said Gordhan in a televised interview with eNews after the MTBPS was tabled in parliament.
Gordhan also expressed a commitment to relieving the deficit. Forecasts are for 6.2% of GDP in the 2010/11 financial year and at 5% of GDP for the 2011/12 year.
Living beyond our means
Meanwhile, ETM economist Russell Lamberti told Fin24.com that South Africa should be living within its means during the downturn.
He added that the budget deficit was effectively "mortgaging our future" because the state will be forced to commit more current funds to servicing debt.
"Another risk is that if interest rates around the world increase next year, that debt will become more expensive to service," said Lamberti.
"If we manage to invest that money in good infrastructure and other sustainable channels, I guess we can get away with it," he said.
Mike Schüssler from economists.co.za said although the fiscal deficit was a bit higher than expected, it was "not a train smash".
Another point of concern was the level of government expenditure, which is seen at 35% of GDP in the current financial year and later stabilising at 34.1% of GDP in the medium term.
Treasury has said that the rise in government spending during the recession "stimulates demand and partially offsets the effects of declining growth in other sectors of the economy".
However, some commentators have said that an increase in fiscal spend to this level effectively limits the amount of investment the private sector is capable of.
"These are the sort of levels you don't expect to see in a developed economy," said Schüssler.
On the positive side, economists called Gordhan's maiden budget a "fair and balanced one" with little evidence of bowing to political pressure on policies.
BJM economist Elna Moolman praised government's commitment to counter cyclical policies. She singled out pressing on with stimulus policies despite the fact that the South African economy has hit rock bottom and is expected to report positive growth next year.
- Fin24.com