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Ratings-friendly budget key for rand

Feb 24 2016 09:57
Fadia Salie

Cape Town - The rand, which tried to breach back below R15/$ for first time this year during the European session on Tuesday, was trading in a narrow band around R15.22/$ on Wednesday ahead of South Africa's crucial budget speech.

"Technical resistance proved too strong as cautious traders eye today’s Budget Speech," said NKC Research in its daily economic report.

"The local unit hit fresh 2-month highs as it continues to battle its way back from abyss, but the beach of Normandy lies ahead today and it could go either way.

"(Finance Minister Pravin) Gordhan will attempt to walk the tightrope of reining in fiscal budget while not sabotaging what little economic growth momentum South Africa has left. Should he succeed, we should see the ZAR break through technical barriers around the psychological R15/$ level.

"If not, the SA currency may well resume its downward slump despite being oversold at present," said NKC.

Adam Phillips of Umkhulu Consulting told Fin24 "it's simple... if it's a ratings-friendly budget the rand will strengthen to R15/$ and below, if not it can quickly go back to R16/$".

"If we don't get a (budget) delivery with key issues being spoken about then the ZAR could run very quickly to 16.00, with the bonds giving up gains that they have made in the last month.

"Operators talk about 14.85 as a support level and I think one still needs to fit the ZAR into what has happened to other currencies this year. Therefore, we are most likely to see bigger moves if the budget does not deliver."

By 09:35 on Wednesday, the local unit was trading at R15.21 against the greenback, slightly firmer than its overnight close, but much weaker than its R15.17 close of local trade.

Against the pound and euro, the local unit was trading at R21.28 and R16.76 respectively.

NKC's anticipated range for USD/ZAR on Wednesday is R15.05/$ - R15.50/$.

On Gordhan's Budget Speech later in the day, NKC said the finance minister will make a case against a sovereign ratings downgrade, while spelling out how government plans to boost economic growth, create jobs and basically please everyone.

"If it sounds like an impossible task, it’s because it is. The best case scenario today would be if Gordhan spreads his tax collection net as wide as possible while making believable pledges to curb expenditure and halt rapid growth of government debt stock.

"Those who are more hopeful might expect radical growth-enhancing policy reforms which might kick-start South Africa’s snoozing economy, though this is wishful thinking," said NKC.

NKC said rating agencies made it abundantly clear that while South Africa’s fiscal budget and, more crucially perhaps, policy credibility (in the wake of December’s finance minister reshuffle) are of utmost importance, the country’s ailing GDP growth environment is still steering it towards junk bond status.

READ: What will happen if SA is downgraded to junk

"Strong performance by Gordhan today will not be enough to stave off the threat of a rating downgrade on its own, but it will go a long way to restoring sentiment toward South Africa which President Jacob Zuma so nonchalantly wiped from the table in December."

READ: Will Pravin Gordhan pull it off?

Phillips said "while the British Tories are at each others' throats causing their currency to touch lows that we have not seen for a while, we hope that Finance Minster Gordhan can use the recent strength of the ZAR to springboard it back to rates we saw before he was appointed".

"It is clear that the maintaining of the rating is important and in order to deliver there has to be a cut back in government spending. To achieve this, it might be that a tax on investments in some form or other might come in. We cannot have our cake and eat it," said Phillips.

In other currencies, Phillips said, the yen is still attracting interest as oil, commodities and equities have turned lower in the last 24 hours.

The British pound continues to move lower and is now below 1.40, as the possibility of leaving the European Union becomes centre stage in the British Parliament, he said.

"The US Fed Dallas president spoke last night of rates being kept low until inflation moves ahead. This allowed the EUR to move back above 1.10, having touched a three-week low of 1.0990 last night."

* Visit our Budget Special and  sign up for our newsletter for same day action on Pravin Gordhan's speech.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest. 24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

budget 2016  |  pravin gordhan  |  markets  |  currencies  |  rand

 
 
 
 

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