Commentary by Johann Els, the group chief economist at Old Mutual:
The 2024 Budget surpassed expectations, featuring several notable positive surprises. These include lower budget deficits, continued primary surpluses, and a lower peak in the debt ratio. Fiscal consolidation as a policy is thus as strong as ever.
The pragmatic approach to expenditure assumptions should also bode well for both the bond markets and the rand. Despite the potential for some market concerns regarding unforeseen expenditures, investors are likely to commend this Budget’s robust focus on fiscal consolidation.
The primary surplus and conservative revenue stance during an election year is commendable.
In terms of credit ratings, I expect this Budget to have a neutral impact. While the Budget’s content may initially bolster the view of rating agencies, they will likely remain wary of election-related uncertainties and the ongoing risks associated with unforeseen expenditure and sluggish economic growth.
Despite the positive aspects, risks to the fiscal outlook persist. Weakness in both local and global economic growth continue to present significant challenges, exacerbated by the underperformance of state-owned enterprises (SOEs), although the commitment to rescuing SOEs remains through various mechanisms, including the recently proposed National State Enterprises Bill.
Net positive impact on the SA equity market
Commentary by Jason Swartz, portfolio manager at Old Mutual Investment Group:
The Budget has led to a positive bond market outlook, although concerns continue to linger regarding overly optimistic fiscal targets.
Going forward, we expect to see an improved risk appetite for bonds, particularly amid a global rating-cutting cycle. But the market faces significant event risks tied to the timing and pace of monetary policy adjustments, the national elections in May, and how the Budget navigates spending pressures versus revenue protection.
The Budget further showed National Treasury’s agility in deficit-funding strategy, leveraging various financing sources to mitigate potential fiscal slippage. A notable wildcard is the government’s decision to utilise the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to fund the deficit, further offering short-term support for South African bonds.
In terms of the equity market, we perceive a net positive impact from the Budget on South African equities. While certain segments may not be sensitive to GDP growth, the more South African-facing and cyclical parts of the market stand to benefit from margin improvements driven by social grant spending, efforts to address energy constraints, and advancements in rescuing Transnet. Government intervention with a conditional guarantee facility of R47 billion to support Transnet’s core activities is a step in the right direction.
From a currency point of view, while the rand has been among the weakest currencies in 2023, its deteriorating fundamentals suggest that it may not be as undervalued as perceived. Despite this, the Budget’s positive reception could lead to modest gains for the rand, although it will continue to face pressure until progress on growth-enhancing reforms accelerates.
In conclusion, while the Budget doesn’t drastically alter our view, local assets may outperform cyclically in 2024. However, the long-term outlook remains tempered by tepid growth prospects and fiscal risks, limiting the potential for unlocking value in local assets.
Lower inflation and interest rates ahead for South Africans
Commentary by Tiaan Herselman, the head of client value proposition at Old Mutual Wealth:
Amid the backdrop of expenditure demands during an election year and mounting government debt, compounded by South Africa’s budget deficit projected to worsen from 4% to 4.9% of GDP, the Minister of Finance delivered a rather “interesting” Budget.
In response to the R56.1bn shortfall in tax collections compared to the 2023 Budget, the government made the unexpected announcement to draw R150bn from the GFECRA. This is in line with global trends and will potentially help to reduce the national deficit from 4.5% (expected in 2024/25) to 3.3% of GDP by 2026/27. We see this as a positive move that will help to stimulate economic growth.
All indicators suggest that 2024 may witness lower inflation and interest rates for South Africans, potentially providing some relief amid the absence of adjustments in the income tax brackets.
Disclaimer: The views expressed in this article are those of the commentators and are not necessarily shared by Moonstone Information Refinery or its sister companies.
