Rand strengthens as Ramaphosa govt takes VAT gamble, SA bonds also rally

JOHANNESBURG — The rand strengthened just over 0.6% in trade on Wednesday to around R11.65/$ as Finance Minister Malusi Gigaba delivered what could be his first and last Budget Speech. Among the key surprises in the Budget Speech included a one percentage point increase in the VAT rate, from 14% to 15%. It’s the first increase of this kind since 1993. Moreover, there are also budget cuts planned and an increase in the forecast of the growth rate. Traders liked what they heard, and the rand reacted positively against the US greenback. Now it’s over to rating agencies. – Gareth van Zyl

By Mike Cohen and Arabile Gumede

(Bloomberg) — South Africa’s ruling party took a political gamble by increasing sales tax ahead of elections next year as new President Cyril Ramaphosa seeks to stabilize debt and prevent a third junk credit rating.

The value-added tax rate will be raised to 15 percent from 14 percent, the first time since the end of apartheid that the government has targeted a charge seen as hitting the poor hardest. Levies on fuel and luxury goods will go up, while spending will be pared back over the next three years, according to Finance Minister Malusi Gigaba.

Read more: In a nutshell: Executive summary of 2018 National Budget

“These fiscal proposals will cause economic discomfort but they are necessary to protect the integrity of the public finances,’’ he said in his budget speech to Parliament in Cape Town on Wednesday. “We dare not borrow irresponsibly, leaving it to future generations to repay.’’

The first increase in the sales tax since 1993 comes just over a year before national elections and could backfire on the African National Congress because it will be seen to be hitting its largely poor and middle-class supporters. The ruling party may be banking on stronger growth this year boosting income, allowing it to provide relief and placate voters in next year’s budget.

Deputy President Cyril Ramaphosa

Labor unions that backed Ramaphosa’s campaign to win control of the ANC in December vigorously opposed a VAT increase, arguing that the government should target wasteful spending instead. Ramaphosa was elected president last week, a day after his party forced Jacob Zuma to quit following a scandal-marred nine-year tenure during which economic growth stagnated.

‘Desperate Times’

“We are in desperate times, so it really required some exceptional measures,’’ said Ismail Momoniat, the Treasury’s head of tax policy. “It was clear that VAT was the least worst.’’

Higher taxes will raise an additional 36 billion rand ($3.1 billion) in the year through March 2019 and be coupled with budget cuts totalling 85 billion rand over three years. The National Treasury expects those measures, together with an improved economic growth outlook, to narrow the budget deficit to 3.6 percent of gross domestic product in the coming fiscal year, from 4.3 percent now.

Forecasts in October that projected gross debt ballooning to more than 60 percent of GDP were pared back. That may appease rating companies that have steadily downgraded the nation and help ward off a cut to junk next month by Moody’s Investors Service.

Political Changes

Moody’s is the only major company that still ranks South Africa’s debt at investment grade after S&P Global Ratings and Fitch Ratings Ltd. punished the country in 2017 following political changes that sapped confidence and knocked financial markets.

Better sentiment since Ramaphosa took over leadership of the ruling party, and the government, is expected to help lift economic growth. The Treasury forecasts a 1.5 percent expansion this year, up from the October forecast of 1.1 percent.

The annual budget speech could be Gigaba’s first and last with Ramaphosa widely expected to replace him and several other Zuma appointees in a cabinet reshuffle.

Finance Minister Malusi Gigaba speaks during a news conference before he presents his mid-term budget to parliament in Cape Town. Photographer: Dean Hutton/Bloomberg

“The president ultimately has the prerogative over this issue,’’ Gigaba told reporters before his speech. “We will support him fully.’’

The budget allocates an additional 57 billion rand over the next three years to finance a plan announced by Zuma late last year to fund free post-school education for poor students. There was also an extra 6 billion rand for drought relief and another 4.2 billion rand for a national health insurance plan.

The budget didn’t promise any additional funding for cash-strapped state-owned companies, although provisions could still be made and financed by selling about 40 billion rand’s worth of state properties.

“Any spending on state-owned companies will have to be done in a budget-neutral way,’’ Gigaba said. “We will have to find resources, probably through the sale of state assets.’’

South African bonds advance as budget seen averting junk status

By Robert Brand

(Bloomberg) — South Africa’s government bonds rallied, sending the yield below 8 percent for the first time in three years, and the rand gained as the budget convinced most investors the country is doing enough to stave off another credit-rating downgrade.

With Moody’s Investors Service poised to lower the country’s local-currency credit rating to junk, investors were looking for evidence the government is willing and able to curb debt and trim the budget deficit under the leadership of newly elected President Cyril Ramaphosa.

They got that: debt is projected to stabilize sooner and at a lower level than previously forecast, while the fiscal shortfall is seen narrowing over the next three years, the National Treasury said in its budget review.

“The market is rallying, bonds are outperforming at the moment,” said Gordon Kerr, a fixed-income analyst at Rand Merchant Bank in Johannesburg. “The market feels that the budget will be good enough to stave off a downgrade by Moody’s.”

The currency climbed 0.7 percent to 11.6490 per dollar by 2:29 p.m. in Johannesburg. Yields on benchmark government notes due December 2026 fell 11 basis points to 7.99 percent, the lowest on a closing basis since May 2015.

The rand has advanced 12 percent since Ramaphosa was elected as leader of the ruling African National Congress in December, setting him on a path to become the country’s president when Jacob Zuma resigned last week. Growing investor confidence has resulted in currency strength and lower borrowing costs, which together with spending curbs enabled the government to target a lower fiscal shortfall, Treasury said Wednesday.

Ramaphosa has pledged to revive an economy that is emerging from its second recession in a decade. Foreign investors bought the most South African bonds on Tuesday since October 2012, and have purchased local stocks for the past 10 days, Johannesburg Stock Exchange data show.