The budget that surprised the markets

TREASURY was again able to put together not only a realistic national budget for 2018/19, but also showed that the government was serious towards bringing state finances back towards a healthy state.

The budget addresses infrastructure and other capital investment, tertiary education spending and land claims issues in a positive manner.

Financial markets as well as global investors embraced these good intentions.

The growth projection of the domestic economy, reaching 1.5 percent in 2018 and rising to 2.1 percent in 2020, set the platform for the government to implement healthy and responsible fiscal policy.

Although some criticism was levelled against the increase in value added tax (VAT) from 14 percent to 15 percent, analysts and economists mostly agree that it was the best way to address the R48 billion tax short falls. The compensation measures to counteract the effect on the poor are in place in the form of increases in social grants and the lowering of income taxes for the lower income groups.

The increased capital expenditure on infrastructure, industrialisation and small business support were also welcomed by investors. The proposed savings in spending of R85bn in expenditure that will help to keep the deficit at 4.2 percent of the gross domestic product, also had a positive effect on the financial markets and should contribute towards stopping any further downgrading actions by the rating agencies.

As a result, the all share index rose since last Wednesday, ending 1.4 percent higher on Friday.

The rand also gained almost 20 cents to R11.54 from the morning before the budget.

The R186 bond rate also started to improve as the rate dropped more than 5 percent since the budget and traded late on Friday at 8.03 percent.

News that the inflation rate came down to 4.4 percent in January also contributed to a 3.4 percent surge in retail share prices.

Although the increase in VAT will have a once off effect on the inflation, it is still expected that the inflation rate will remain at levels close to 4.5 percent for the rest of the year.