All eyes fixed on rand ahead of budget

Fresh from a run of weekly gains pushing it to its best monthly gain since January, the rand could be in for a rocky ride as investors await details of finance minister Tito Mboweni’s plans to fix SA’s fiscal woes and appease credit-rating agencies.

Mboweni’s medium-term budget policy statement on Wednesday will probably confirm that a weak economy, taxcollection shortfalls and bailouts for state-owned enterprises such as Eskom will saddle SA with its widest budget deficit in a decade. Economists will be on the lookout for a credible plan from the minister to cut spending or boost revenue.

He must convince markets that there is a viable strategy to fix Eskom, which analysts see as the economy’s biggest risk due to its R450bn debt and operations crises resulting in power cuts that have crippled key economic sectors.

A review by Moody’s, the only major ratings agency with an investment grade on SA, is due for release on Friday.

No rating change is expected, though the outlook may be changed from stable to negative. But if there is a Moody’s downgrade it could push the rand to as weak as R16/$, Standard Bank currency trader Warrick Butler said.

A budget seen by markets as positive and a reprieve from Moody’s could, on the other hand, push it to as strong as R14.20, he said.

To say it is a crucial week for the rand could be the understatement of the year, Monex Europe analyst Simon Harvey said. This week’s news flow would eventually determine capital flows for months to come, he said. The rand was also battered by ANC-alliance infighting that helped knock business confidence.

Investec economist Kamilla Kapan wrote last week that the 2019/2020 budget deficit would probably climb to 6.1% versus the 4.5% forecast in February.

The state is likely to adjust its 1.5% growth forecast for 2019 to closer to the Reserve Bank’s 0.6% projection, and revise upwards its expectations for debt as a percentage of GDP.

The rand gained 3.44% against the dollar so far in October, and is on track for its biggest gain since rising 7.65% in January, having also benefited from speculation that the US Federal Reserve will cut interest rates on Wednesday.

Lower rates overseas improve the yield appeal of local assets, supporting demand for the rand. A stronger rand helps contain prices of imported goods, making it likelier that inflation will stay under control and enable the Bank to cut interest rates.

SA’s higher yields suggest fiscal deterioration has largely been priced in, Mercato Financial Services analyst Nico du Plessis said.

“There is no doubt that Mboweni has a mammoth task on his hands,” Du Plessis said.