Blindsided: markets react

The rand snapped three days of gains and fell the most among emerging-market peers yesterday after Finance Minister Tito Mboweni blindsided markets with a medium term budget speech that outlined higher fiscal deficits and warned that state revenue will continue to undershoot.

Here’s the reaction from traders, analysts and economists:

Piotr Matys at Rabobank:

Mboweni’s budget was “the opposite of what the market was hoping” for. “It’s also a timely reminder that SA faces tremendous fiscal challenges amid weak economic activity constrained by structural issues.”

Win Thin at Brown Brothers Harriman:

“I was clearly too optimistic that Mboweni would announce enough fiscal tightening to keep the ratings agencies at bay. Risks of downgrades have gone up.”

Bernd Berg at Woodman Asset Management:

“South Africa remains stuck in a low growth, highdebt environment and it is difficult to get euphoric about the outlook for the rand at this juncture. With little positive domestic drivers and a challenging external environment, especially for SA’s main export partner China, it is hard to see the rand outperform its emerging market peers in the short run.”

Razia Khan at Standard Chartered:

“The initial, knee-jerk reaction of the market to the budget was understandably negative” and markets started to price in less benign ratings reviews. Still, “we believe that the tax buoyancy assumptions in the medium-term are deliberately conservative. Even the revenue ‘miss’ in the current year is arguably due more to VAT rebates – a good thing, which ultimately strengthens tax compliance – rather than just the growth slowdown. Although the higher debt path outlined may trigger some concern, this is no justification for a downgrade in itself” from Moody’s.

Hans Gustafson at Swedbank

It will be a “very challenging” environment for SA “with a higher borrowing requirement in an environment with tight US liquidity and global weaker growth. The rand needs to incorporate a higher risk premium”. – Bloomberg