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Markets give initial thumbs up to Godongwana’s ‘tough love’ MTBPS

Markets give initial thumbs up to Godongwana’s ‘tough love’ MTBPS
Enoch Godongwana, South Africa's finance minister, delivers his medium-term budget to Parliament in Cape Town, South Africa, on Thursday, 11 November 2021. (Photo: Dwayne Senior / Bloomberg via Getty Images)

The initial market reaction to the finance minister’s Medium Term Budget Policy Statement was a cautious thumbs-up. That’s not a bad sign.

The rand gained ground against the dollar in the wake of Finance Minister Enoch Godongwana’s statement to parliament, which was impressive as the greenback has been robust after data on Wednesday showed US inflation raced to a three-decade high, prompting expectations of looming rate hikes in the world’s biggest economy. 

The rand hit 15.12/dlr at one point from 15.46 in the morning before pulling back a bit. 

The yield on the key 10-year bond fell 20 basis points to 9.235%, a sign that the bond market welcomed a statement that was not populist while setting out a sketch of debt reduction. 

The JSE’s All-share index was up about 1% on the day, but equities markets are less sensitive to the utterances of finance ministers. 

The minister spoke of ‘tough love’ as he drew a line in the sand on bail-outs to ailing SOEs, signalling restraint on one deep hole where hundreds of billions of rand have gone down over the years. 

Noting that metals prices — which have given the state a fiscal boost — have been softening, he said that: “We should not make permanent spending commitments from short-term revenue benefits. This approach is embedded in our fiscal framework. 

“The consolidated budget deficit is expected to be 7.8% of GDP in 2021/22, gradually lowering to 4.9% in 2024/25,” he said. 

It remains to be seen if that can be achieved, but the markets, initially at least, liked his tough love tune. 

“The key positive in our view is the very conservative budgeting — not treating any temporary windfall from mining as permanent and no new big-spending initiatives on the back of revenue that may not be long-lasting. The market seems to like this, but South Africa’s expected weak growth and a medium-term debt path that still rises, both suggest that the country’s big challenges are still very much in place,” said Razia Khan chief Africa economist at Standard Chartered Bank in London. DM/BM


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