What’s Up Wednesday (Video & Transcript): 24 February 2021

TRANSCRIPT

Wednesday the 24^th of February sees Finance Minister, Tito Mboweni deliver our 2021 Budget Speech. This is always a risk event for the Rand so what are the possible positives that could support the Rand, and are there any negatives that the Rand needs to watch out for? 

• In October, our mini budget speech was extremely downbeat as SA tried to drag itself out of the lockdown’s worst period but in the months since then there have been surprising pockets of good news.  The most notable of these has been the start of what’s being dubbed a “commodity super cycle” where countries around the world are gobbling up resources to kick start economic growth and this has translated into higher commodity prices coupled with increased volumes of these key exports from SA.  The result for SA is our trade surplus is deep into positive territory which is Rand positive while tax revenues in this sector have mushroomed.  Estimates call for R90bn more revenue than predicted in October and this could mean no major tax hikes.
• The faster than expected uptick in activity late last year should see our debt to GDP ratios be revised down from 15.7% to 13.8% of GDP while Mboweni could also adjust our 2020 GDP contraction estimate from 7.8% closer to 7%.  We are still in a bad place, but not as bad as feared in October and that could be Rand positive given that the bad news is priced into the market.
• On the negative side the usual suspects will be lining up top of which is government’s plans to curb expenditure with public sector wages already making up 35% of government spending.  Trade unions are not going to budge so just how Mboweni is going to cut R300bn in 3 years as was promised a year ago remains to be seen.  Added to the wage bill, the life support of SOE’s and Eskom’s debt pile will come government’s plan on financing our COVID vaccination roll out which is further strain on the fiscus.
• Of course, everything Mboweni speaks about will be reviewed by the 3 main credit ratings agencies and the Rand could suffer if the market predicts further cuts into junk status. 

Are there any other local events going outside of the Budget Speech which could move the Rand?

• The Budget Speech is the main event but there are a few other items to note including our unemployment rate moving to a record high of 32.5% (Rand negative), the building tension between the Zondo Commission and Jacob Zuma (our international image on accountability) and our increased vaccine roll out across medical staff and then those most at risk (Rand positive)

South Africa does not exist in a bubble so what is going on abroad that will impact the Rand no matter what happens with our Budget Speech?

• While our local headlines will move the Rand today most of our movement comes from international factors, and in particular developments in the US.  Current touchpoints that the Rand needs to be aware of include:
  • US bond yields have been at historic lows in 2020 with their 10-year Treasury falling to 0.5% but in the past few weeks US bonds have had somewhat of a recovery with the 10-year jumping to 1.39%.  While this is way below our 8.69% on a 10-year SA government bond it is relatively high in the developed world and this attracts Dollar inflows into the States which strengthens the Dollar and hurts our exchange rate.
  • The US has been positing better than expected market data which suggests they will outstrip the rest of the world in their economic recovery and this has made investing in the US attractive for international players, and again this demand for Dollars has hurt the Rand.
  • Fortunately for the Rand while US market data has been strong their employment stats have been very poor, and with the US unemployment rate remaining stubbornly high this has led the Federal Reserve confirm US interest rates will stay close to 0% until 2023 at least and this has overruled bouts of Dollar strength and entrenched a longer term downtrend in the Dollar
  • Looking at the UK Boris Johnson has announced a staged emergence from their latest lockdown restrictions thanks to their massive vaccination program (over 16 million shots administered).  This coupled with the recent Brexit resolution means the Pound is well positioned for gains and could make the Rand vulnerable to losses in this currency pairing.  

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