What to look out for in the budget today with the rand in limbo

Rand Source: Google Images

Rand volatility is expected on Wednesday as finance minister Tito Mboweni makes his final preparations for the 2019 budget speech.

The local unit traded just above R14.00 against the dollar in the morning session.

Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions said that the reaffirmed dovish stance of the US Federal Reserve saw the euro rebound off a 3-month low against the dollar and the rand gaining momentum against the greenback.

“This, coupled with positive comments from president Trump regarding the trade talks, gave the local currency a welcome boost, opening at R14.01/$ this morning,” Botes said.

“Economic D-day has arrived for South African finance minister Tito Mboweni. Markets will seek clarity and answers for embattled SOEs with the focus on Eskom and SAA, taxation and the government’s debt and wage bill. Minister Mboweni will aim to strike a balance in a very tough environment where stakeholders, such as ratings agencies and unions, are at odds about what the budget should contain.”

“We expect volatility throughout the day with a technical range of R13.98 to R14.28,” Botes said.

Steven Nathan, founder and chief executive officer of 10X Investments, said he expects a lengthy speech, but little action from Mboweni.

Mboweni must walk the tightrope between being right or popular, said Nathan. “Sadly, doing the right thing is seldom popular.”

“The pressures on our national purse are immense, from failing state-owned enterprises and municipalities to a bloated civil service, failing infrastructure and relentless service delivery demands. Tax revenues are expected to disappoint and push the budget deficit to almost 5% of GDP.

“The traditional recourse is to borrow some more but, with our national debt on the brink of becoming unmanageable and unaffordable, that door is closing,” he said.

According to Nathan, many things are rotten in the state of South Africa, and that flows through to the country’s finances. “It is a dire situation that requires drastic attention. There are two immediate options – raise revenue and/or reduce expenses – but they may not be financially sensible in the medium term.”

Nathan said that hiking taxes may work in the very short term but is likely to reduce tax receipts over time.

“South Africa has a small number of individuals generating the bulk of personal income tax. It is risky to expect this small group to continue carrying this burden when it seems large chunks of government expenditure is consumed by corruption, fraud and waste.

“This applies to the corporate sector. In general, productive, capable people do not like pouring money down the drain for ever.”

Hiking VAT again is completely off the table, politically, Nathan said. “Hiking personal tax rates would reduce consumption and that would flow through to lower economic growth, fewer jobs and lower corporate profits and taxes.”

Nathan said that an obvious move would be to reduce government expenditure. “On paper this seems easy. First reduce corruption, which should immediately eliminate billions of government expenditure.

“Reducing South Africa’s relatively bloated and expensive civil service and state-owned enterprises seems another fiscally obvious choice. But the challenge that Mboweni faces is that this is politically unattractive due to a potential backlash from unions as well as those who are benefitting from these inefficiencies.

“This is a pity since action in this area would send a hugely positive signal to business and foreign investors, and make them more likely to invest more in South Africa, create more jobs than are lost, and grow the economy and the tax base.”

Mboweni, Nathan said, must walk the tightrope between being right or popular.

“South African fiscal behaviour, measured by our budget deficit, has been irresponsible for many years. We spend far more than we earn, believing that some miracle will wipe out our ever-growing debt burden.

“Instead, we should implement sound fiscal management by balancing the budget. Stamping out corruption and wasteful expenditure would go a long way toward achieving this.”

There is no scope to push up company tax rates, not when we are trying to attract foreign investors, Nathan said. “It’s also not realistic to squeeze more money out of our middle class, which, notoriously, pays amongst the highest direct and indirect taxes in the world.”

He added that Mboweni at all likely to announce significant cuts to state spending in an election year. “The trade unions – or alliance partners, as they are called before an election – are restless already after President Cyril Ramaphosa talked about breaking up Eskom (which triggered fears of privatisation) during his State of the Nation address earlier this month.”

Nathan said that Moody’s, the credit rating agency, is still undecided how this will play out. “It appears reluctant to drop the sword on our investment grade rating, because condemning our local government debt to junk status could flatten the rand, ignite inflation and strangle our economy. But at some point, it may have no other choice.”

Nathan said that the finance minister is likely to propose ‘cosmetic changes’, apply the usual increases to sin taxes, and squeeze a bit more out of various levies. “But he will find it near-impossible to make a bold play – such as a tax on retirement savings, for example, or prescribing retirement fund assets, or impose some other form of wealth tax – without incurring the wrath of the markets.”