With the Medium-Term Budget Policy Statement (MTBPS) looming large this Wednesday, investors remain focused on South Africa’s fiscal position. It is against this backdrop that Finance Minister Enoch Godongwana’s speech on Friday evening at the annual Kgalema Motlanthe Foundation Inclusive Growth Forum in the Drakensberg was
closely monitored.
Standing firm in his stance on public finances in the face of criticism, Godongwana expressed concern about the shrinking fiscal space due to weak economic growth, rising public sector wages and reduced revenue from state-owned enterprises like Eskom and Transnet.
He has been labelled “Mr. Austerity” by his critics but is willing to accept the label.
Godongwana acknowledges the challenges of weak revenue and increasing costs, suggesting that borrowing may need to increase to offset budget cuts. He is also worried about the massive public debt of R4.3 trillion and rising debt servicing costs, warning that the government risks running out of cash if not managed properly.
He defended his position against critics who oppose budget cuts and expressed concerns about the impact of load-shedding on the economy.
He also highlighted inefficiencies in the state sector, including corruption and the need to professionalise the civil service. He concluded by promising positive developments in his budget presentation.
On the data front, we have both money supply figures and the government finance figures for September to digest from a local perspective.
Credit demand is responding to rapid interest rate hikes, a lack of business prospects and widespread pessimism from households and businesses. This bodes poorly for any credit-driven growth hopes. In particular, the demand for mortgages is being weighed down by higher borrowing costs and weak labour market conditions, which
increase the risk of a long-term financial commitment. The growth rates in private sector credit and money supply are expected to have declined further in September.
Although inflation is picking up on external oil impacts, lower monetary base pressure will help ensure that domestic price pressure sources do not exacerbate this pickup.
Market expectations are for a print of 3.50% against a previous reading of 4.39%.
Overall, the government’s budget position has worsened as economic reality bites, forcing the government to raise debt at increasingly expensive rates. Revenue collections are responding to slowing growth domestically and weaker commodity prices. Therefore, an apparent bottoming out in the coal price (a key export) is welcome and should help prevent a further dramatic deterioration in corporate income tax collections.
Risks on the expenditure side abound, including financially unviable SOEs and deteriorating infrastructure. A seasonal improvement in the government’s budget position is likely in September.
Overall, however, the broader picture remains worrisome, with all eyes turning to the Medium-Term Budget Policy Statement on Wednesday to determine if the government has the appetite to implement urgently needed structural reforms.
Bloomberg consensus forecasts are pencilling in a budget deficit of R12.1 billion, versus a prior print of -R47.3 billion.
FINANCIAL MARKETS: Expect a cautious start to the week
- Oil falls further this morning
- Markets expected to start the week cautiously ahead of the deluge of macro and data events
Oil prices fell by around US$1/bbl this morning in Asia as investors exercised caution ahead of the upcoming Federal Reserve policy meeting and China’s manufacturing data release.
Brent crude futures dropped 1.1% to US$89.50 a barrel, while US West Texas Intermediate crude was down 1.2% at US$84.54 per barrel. Investors are closely watching the Fed meeting, US employment data and earnings from Apple for any signs of an economic slowdown that could affect fuel demand.
While oil prices had risen 3% on Friday due to increased tensions in the Middle East related to Israel’s actions in Gaza, there was a subsequent retreat as it appeared the conflict would not escalate further, although a more regional conflict cannot be ruled out. Both Brent and WTI experienced their first weekly decline in three weeks.
Looking ahead, investors will digest China’s manufacturing and services PMI data for October to gauge the state of the economy and its impact on fuel demand in the world’s top crude importer and the second-largest oil consumer, following recent supportive policies launched by Beijing.
Asian stocks are mixed this morning, with regional factors driving some markets while the broader region is now almost squarely focused on what the US Federal Reserve will serve up this Wednesday when Fed Chair Powell announces the FOMC decision on monetary policy.
The market is positioned for an unchanged verdict, but the accompanying statement can either boost sentiment towards equities, should he signal an end to monetary tightening, or conversely cause a further spate of
selling if the statement is deemed hawkish.
US Treasuries ended last week mixed, with the curve twist steepening as front-end tenors closed the week richer amid renewed concerns over developments in the Middle East and as US price data came out in line with expectations. Yields on the 2-yr tenor were down almost 4bp on the day, while benchmark 10-yr yields edged
slightly lower by 1bp and longer-dated tenors weakened.
There has been some early weakness this morning within the futures market, suggesting that traders are focussing on the upcoming US refunding announcement. Investors will find out how much long-term debt is going to be offered, and recent trends suggest that this will add more pressure to longer-dated tenors as US borrowing surges amid higher spending.
The refunding announcement will take place on Wednesday, just before the FOMC decision.
The local bond market witnessed a mild improvement across the curve into the weekend, with yields falling by around 5bp on average across the curve. Position-taking will be kept to a minimum at the start of the week given the looming Medium-Term Budget Policy Statement due on Wednesday.
The rand is changing hands around the USD/ZAR18.80 this morning, almost unchanged in the Asian session. The tone of foreign exchange trading has been cautious today ahead of the deluge of both local and international macro events and data this week. R
isk appetite is fragile, and we expect the markets to ebb and flow as data is released. Support for the currency pair can be found at USD/ZAR18.70, while resistance is at last week’s high of USD/ZAR19.26.