Johannesburg - South African stocks initially gained and the rand strengthened after investors appeared to react positively to Finance Minister Malusi Gigaba’s 2018 Budget Speech on Wednesday.
The JSE All-Share Index rallied 1.5% to 58 783.21 index points while the rand traded 0.7% stronger at R11.64 at 5:08 local time on Wednesday, shortly after Gigaba finished speaking.
The local currency fell to a low Of R11.73 on Thursday, and strengthened to trade at R11.68 at 09:30 on Friday.
Faced with weak economic growth and constrained revenue collection Gigaba opted for no significant increase in personal income taxes, instead opting to limit inflation relief on personal income tax rebates while at the same time lifting the value-added tax (VAT) rate to 15% from 14%.
“Although the consumer will be negatively affected from higher taxes and levies in the near term, this should be more than offset from the potential for lower interest rates and improved consumer and business confidence,” said Bernard Drotschie, deputy chief investment officer at Melville Douglas.
“We would expect the JSE to benefit from the turnaround in sentiment towards the state of government’s finances. It is clear that government understands the challenges facing the country, and is willing to address them head-on.”
Gigaba’s tax changes are expected to raise a combined R36bn this fiscal year while on the expenditure side, he pledged to slash R85.7bn in wasteful government spending over the next three years in an effort to stabilise the nation’s debt.
This is expected to help lower the budget deficit to 3.6% of GDP in 2018-19, from the 4.3% estimated for 2017-2018 in the Medium Term Budget Policy Statement (MTBPS).
South Africa’s debt to GDP ratio is projected to reach 53.3% in 2017-18, before rising to 55.1% in 2018-19. This compares to 57% for 2018-19 estimated by the MTBPS. The economy is expected to grow by 1% in 2017 and 1.5% in 2018 versus estimates of 0.7%, and 1.1% as per the MTBPS.
“The bottom line is that National Treasury has presented a much-improved and credible budget,” said Drotschie. “Lower government debt ratios lessen the likelihood of a downgrade by Moody’s. This will ultimately be positive for domestic companies given the change in sentiment and confidence at both a consumer and business level.”
Moody’s is the only major ratings agency that still ranks South Africa’s debt at investment grade, following decisions by Standard & Poor’s as well as Fitch Ratings to lower the country’s credit rating to junk in 2017.
Gigaba also allocated R57bn for free higher education and training for poor students in the medium term. This amounts to R12.4bn in 2018-19, R20.3bn in 2019-20 and R24.3bn in 2020-21. This is over and above a provisional allocation of R10bn provisional made in last year’s budget.
“Free-fee education will allow greater access to universities, which will improve the much required skill levels in SA,” said Drotschie. “Ultimately that will be positive for GDP growth, poverty alleviation and reduced social unrest, which is in turn is likely to be good for all sectors.”
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