The Rand is on edge as markets await the budget

South Africa’s rand traded smoothly on Monday (20 February), but stayed lower as markets anticipate fiscal policy measures by the finance minister in his budget statement this week on Wednesday (22 February).

The dollar was likewise slightly changed against a basket of world currencies, according to Reuters.

The rand in South Africa has experienced its worst start to the year in almost a decade, losing 7% of its value versus the US dollar in the first six weeks of 2023, according to DailyInvestor.

A higher US dollar and South Africa’s economic challenges, such as load-shedding, deteriorating infrastructure, and policy uncertainty, are some of the causes for the currency’s weakness.

Furthermore, the healthy US labour market, which may result in extended high inflation and interest rates, has bolstered the US currency.

Domestically, Enoch Godongwana, the finance minister, is scheduled to deliver revised income, spending, and economic growth predictions for the country.

There are also proposals for the government to take on significant debt from the faltering national power provider Eskom.

According to a Reuters survey conducted last week, the consolidated budget deficit would be 4.5% of GDP for the fiscal year beginning in April and 4.4% of GDP the next year, down from 4.8% of GDP in 2022/23.

According to Jeff Ryan, managing director of AWCape, CEOs and financial executives alike are looking forward to tough economic measures for South Africa. Ryan predicted that revenue collection will be a major subject this week as well.

He stated that the government’s plans for corporate taxes are unclear.

“It is my recommendation that corporate tax rates should be significantly reduced in these circumstances. The rationale being a lower corporate tax burden for businesses will enable them to invest and grow in their businesses.”

According to the managing director, this leads to higher profitability and, as a result, expanded employment. This increased employment results in a larger income tax base, which raises the total tax collected.

The rand is also facing the potential consequences of a greylisting this week, with markets bracing for a potential reputational hit for South Africa, which might impact certain local asset values.

The possibility of greylisting would make conducting business with the nation more difficult owing to increased compliance checks, particularly for cross-border transactions.

According to a research by Business Leadership South Africa (BLSA) and Intellidex, there is an 85% possibility that the Financial Action Task Force (FATF) would decide against South Africa.

The GDP effect is anticipated to be less than 1% if the government acts quickly, but it might approach 3% if South Africa is regarded to be lethargic and reluctant to fulfil the FATF’s requirements.

The rand is presently trading as follows:

• Dollar: R18.13/$
• Euro: R19.37/€
• Pound: R21.80/£