Home Opinion and Features Budget 2024: Global investor sentiment bad for the rand

Budget 2024: Global investor sentiment bad for the rand

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THE MARKETS ON MONDAY COLUMN: Since last Thursday, global market sentiment has turned negative and, as a result, the rand depreciated sharply by more than 40 cents, writes economist Chris Harmse.

Finance Minister Enoch Godongwana delivered the Budget Speech in Parliament last week. Picture: Ayanda Ndamane, Independent Newspapers

AS I HAD forecast in my article previewing Budget 2024 last Monday, the government decided to apply its Gold and Foreign Exchange Contingency Reserves to decrease its gross borrowing requirement.

Indeed, the Treasury announced that the SA Reserve Bank (SARB) would provide R100 billion in 2024, and R50bn both in 2025 and 2026 to Treasury to settle some of its debt.

This step will decrease the government’s gross borrowing requirement from R553.1 billion in 2023/24 to R428.5bn in 2026/27. It will contribute towards the government’s gross loan debt to stabilise at 75.3% of gross domestic product in 2025/26, slightly lower than the level of 77.7% projected in the 2023 Medium-Term Budget Policy Statement.

Initially, just after the Budget Speech on Wednesday, the foreign exchange markets viewed it in a positive light. As a result, the rand initially appreciated from levels of around R18.90 against the dollar to R18.86/$.

Since last Thursday, global market sentiment has turned negative and, as a result, the rand depreciated sharply by more than 40 cents. On Friday it traded at R19.30/$ – its weakest level since early October 2023.

This sharp depreciation came as investors reassessed South Africa’s Budget as their markets opened last Thursday morning.

Not only do investors remain sceptical if the Reserves will indeed be used to bring down South Africa’s government debt, but also investors are of the view that Finance Minister Enoch Godongwana provided negligible details on long-awaited, broad structural reforms towards alleviating the high unemployment and stagnant economic growth.

This came after Statistics South Africa (StatsSA) announced last week that South Africa’s unemployment rate picked up from 31.9% in quarter three to 32.1% during quarter four 2023.

South Africa’s inflation rate increased to 5.3% in January, from December’s 5.1%. This is on the higher range of the inflation range the SARB is targeting – an unofficial 4.5% midpoint of the its 3% to 6% target range.

Financial markets are expecting that the South African repo rate will remain elevated at 8.25% for some time, especially as it becomes also clear that the US Federal Reserve is unlikely to start decreasing its bank rate during the first six months of this year.

Despite the negative global sentiment against South Africa, equity prices performed quite well last week. Resources, metals and other commodities recovered strongly on the back of much stronger markets in Europe, Asia, and the US and supported by the weaker rand since Wednesday.

The all share index gained 1.03% last week. Resources recovered strongly since last Wednesday given the weak rand and ended the week flat, with the Resource10 index losing 0.2%. Dual-listed companies performed very well, helping the industrial board to end the week strong as the All Share Industrial Index (ASI) ended Friday 1% higher than the previous Friday close. The Financial 15 index had a good week gaining 1.2%.

In the US equities are continuing to perform. The dichotomy in the US financial markets remain strong, namely strong growth despite high interest rates.

The news that US weekly jobless claims came down considerably from 213,000 to 201,000 and well below expectations of 218,000, suggests that the US economy remains robust with higher demand for labour. This will contribute to the unemployment rate remaining well below the 4.2% target set by the Fed before cutting interest rates.

The S&P500 index ended the week 1.5% higher and has gained 4.5% over the past month. For the year to date the index is already 7.3% in the green.

This coming week local markets will be nervous due to the pressure on the rand. StatsSA will release the production price inflation rate (PPI) for January on Thursday. It is expected that the prices at the factory gate have increased by 4.2% since last year January. This is an increase of 0.2% on the December 2023 rate of 4% and confirmation that the SARB likely will not decrease its repo rate at their next meeting in March.

On global markets, the release on Wednesday of the second estimate of the US gross domestic product growth rate will be important.

Markets expect that the US growth rate will remain above 3% (3.3%). The US will publish its latest personal income and spending data on Thursday as well as the important weekly jobless claims.

On Friday the US ISM manufacturing Purchasers Managers Index (PMI) for February will be announced. Most other developed market countries will also release their manufacturing PMIs this coming week. Japan’s inflation rate for January, to be released on Tuesday, will also be important.

* Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

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