Rand wobbles, markets react – but Budget delay isn’t a crisis (yet)

“The sky is falling! The sky is falling!”

Fans of Chief Vitalstatistix from the Asterix comics might have felt this way after Wednesday’s shock announcement that the 2025 Budget Speech would be postponed – something that hasn’t happened since 1984. Many anticipated a significant fallout in the markets and a plunge in the rand, fearing that international markets might interpret the delay as a sign that the Government of National Unity (GNU) is in trouble. However, early indications suggest that the sky is still where it should be – for now.

The postponement of the Budget Speech on 19 February, stemming from disagreements within the coalition government over a proposal to hike value-added tax by two percentage points to 17%, led to immediate negative market reactions.

According to PSG Wealth, the FTSE/JSE All Share Index experienced a near 0.20% decline, reflecting investor concerns about political stability and the government’s ability to implement fiscal policies. At the same time, the rand depreciated by about 1% against the US dollar, as investors grew uncertain about the country’s economic direction.

However, Reuters reported that the rand firmed slightly in early trade on Thursday, recovering some of the previous session’s losses as focus shifted from the budget delay to the first meeting of G20 foreign ministers in Johannesburg taking place on 20 and 21 February.

Annabel Bishop, chief economist at Investec, says markets are still weighing the implications of the delay in the Budget. She adds that by late afternoon yesterday, a mild reaction was evident in the bond market, with concerns likely about how the revenue shortfall would be funded.

“We do not expect much reaction from the rating agencies. S&P, one of the three key rating agencies (along with Fitch and Moody’s), put South Africa on a positive outlook (indicating the potential for an upgrade from BB-) in November last year,” says Bishop.

According to Bishop, international market sentiment is now focused on the United States, where the Republicans’ Budget plan will be unveiled on Thursday.

“Politics, and various economic and other policies of political parties, have become noisy around the world, not just in South Africa. We expect markets will continue digesting the implications of the delay in South Africa’s budget but will not see this as the GNU falling apart,” says Bishop.

Glass half full or half empty?

René van de Spreng, a wealth manager and director at Apex Private Wealth, and one of the three finalists for the 2024 Financial Planner of the Year Award, says the postponement of the Budget Speech was certainly a surprise.

“However, in saying that, this is not an isolated incident, as it has happened in France, Germany, and Canada before.”

He notes that although the situation may not be ideal, there is a positive aspect to consider.

“It indicates that the coalition is functioning to some extent, as evidenced by the ANC’s inability to unilaterally impose its agenda and the active participation of other parties in this unity government. Ultimately, South Africans desire effective governance and fiscal decisions that benefit the nation as a whole.”

Van de Spreng adds that the postponement reflects deep divides within the fragile 10-party GNU, particularly around the country’s fiscal management.

“It appears that the ANC believed it was still the key decision maker after informing coalition partners about the VAT hike only hours before the delivery of the Budget.”

Gareth Collier, a Certified Financial Planner and the founder of Firecrest Modern Capital – also a finalist for the 2024 Financial Planner of the Year Award – says the decision to postpone the Budget was a mature and responsible one.

“It shows a willingness to follow a democratic process within the GNU. This should be received in a positive light, as global powers see that the unilateral power and influence of a single ruling party will no longer be the sole voice of a nation with many challenges.”

Rudolph Geldenhuys, a senior financial planner at WealthUp and this year’s FPI Financial Planner of the Year winner, says the pushback on the VAT hike could be positive.

“Unlike in the past, when a majority party could pass decisions unilaterally, the GNU now forces discussion and accountability. Ideally, the GNU should have discussed the Budget in advance to present a unified front rather than postponing the Budget Speech. However, this delay could be an opportunity for them to align and demonstrate accountability – something we haven’t seen much of in the past.”

Impact of the postponement

For the government, the two-percentage-point increase in the VAT rate could yield up to an additional R58 billion in revenue for 2025/26. National Treasury argues that, as a consumption tax, VAT impacts all households through price hikes, but higher-income households bear the majority of the burden.

According to the Budget Review released on Wednesday, more than 75% of VAT revenue comes from households in the top four expenditure deciles – those spending R118 000 or more a year.

“Increasing taxes on consumption through a higher VAT rate will have the least detrimental effect on economic growth and employment over the medium term, relative to increases in personal or corporate income taxes,” Treasury states.

The VAT increase is expected to provide additional funding for essential services, including investments in education, healthcare, early childhood development, and commuter rail services.

Collier says the VAT hike came out of the blue.

“Most of the speculation had been for a 1% increase; no one previously seemed to have a sense that it could be as high as 2%. Before yesterday many models and market positions would have been preparing for the rumoured 1% VAT hike.”

He says, in the coming weeks, this response will be reworked to adjust for a possible 2% hike but also a scenario where there is no VAT hike.

“Generally, such expectations are priced into the market before the official announcement. Once an announcement is made, the market should react and re-rate into a greater state of equilibrium once certain unknowns become known.”

Geldenhuys points out that another factor to consider is that the tax year might shift.

“This could mean extending it by a month or shortening the next tax year to 11 months. There’s no certainty yet, but such a change would affect payroll, tax certificates, and our usual financial rhythms. We’ll have to wait and see how it unfolds.”

Can citizens afford a 2% hike?

Collier says that South Africa’s domestic challenge lies in the fact that the country’s tax base is too small to support continued direct tax hikes.

“We cannot tax our way to prosperity,” he says.

He emphasises the need for economic growth and stimulus.

“But that has been severely hampered by wasteful government expenditure, a hugely overinflated Cabinet, and record numbers of government employees. If you remove government employee figures from employment tracking records, we’ve essentially flatlined in job creation for many years. This is a completely unsustainable situation and will eventually crack.”

Geldenhuys speculates that the proposed VAT increase may be a strategy the finance ministry considered to raise revenue and better manage debt repayments, given the country’s high debt-to-GDP ratio.

“On the other hand, such a hike would place significant strain on many South Africans, exacerbating the already widespread poverty.”

He adds that one perspective is that VAT, being paid by everyone, not just the rich or poor, makes it a more evenly distributed tax measure.

“It avoids further burdening personal income taxpayers, who are already under pressure. However, I don’t know who is right or wrong in this debate.”

Van de Spreng says that if the VAT hike proceeds, the nation will face even further burdens.

“South Africa is already grappling with soaring food prices, increasing electricity costs, and high unemployment. There’s no doubt that the tax hike would hit the 32 million people living below the poverty line the hardest.”

However, he acknowledges that, fiscally, options are limited, and a VAT increase could make sense.

“The country has anaemic growth, with a forecast of just 0.8% for the year, and reduced tax collection – R19bn less than expected – which further limits the options.”

Van de Spreng adds that the biggest question remains whether the coalition partners can resolve their differences in the coming weeks before the Budget Speech, now rescheduled for 12 March.

“No doubt, political jostling will continue, and it remains to be seen if the GNU can overcome this significant hurdle and come out on the other side stronger and more united,” he says.

Financial planning – sell or hold

In the meantime, a key question for many is how the postponement could impact financial planning.

Geldenhuys says that although there may be short-term effects, in the long run, this will be just a blip on the radar.

“Most of us plan our finances for the long term. Our retirement planning is long term. Yes, you may retire in the short term, but you will be retired for a considerable time.”

He acknowledges that some people may panic.

“I’m not saying you shouldn’t react to news, but you should always consider what the reasonable course of action is. Often, people react purely out of fear or uncertainty, and decisions made from a place of fear are generally not good ones.”

For those who see the Budget Speech postponement as a sign of impending crisis, a knee-jerk reaction might be to liquidate investments or move money abroad.

“But the reality might be the opposite. The second budget could be an improvement, demonstrating not that the GNU is falling apart, but that it is actually working, with multiple parties holding each other accountable for South Africa’s financial direction.”

He warns against overreacting, as the long-term effects remain unknown.

“If you sell your stocks now out of short-term fear, you might incur a loss, only to see markets recover when the revised budget is well received. Similarly, if you move your money abroad expecting the rand to weaken, and it strengthens a few weeks later, you may have eroded some of your wealth.”

However, Geldenhuys clarifies that he is not suggesting investors bury their heads in the sand and assume everything will be fine.

“You must protect yourself. My best advice is: if you’re unsure, speak to your financial planner. Have a conversation, express your concerns, and ask about the possible negative impacts and mitigation strategies. It’s not about timing the market – it’s about time in the market, and we often forget that when uncertainty arises.”