One barometer of how a South African Budget speech has been received is the initial reaction from the markets. If forex and bond traders and the institutions they make money for are not convinced it is credible, the rand will quickly sink and bond yields will spike higher. 

As it turns out, Godongwana’s Budget on Wednesday was seen as at least reasonably credible in such circles. 

The rand immediately strengthened to 18.82/dlr when the minister started speaking from the 18.91 it was fetching just before he began. It was holding on to those gains more than an hour later, suggesting the Budget was viewed in a relatively positive light, but did not shoot the lights out. 

Meanwhile, yields on the 10-year government bond fell almost seven basis points to 9.988%. Getting below the 10% level is kind of a psychological threshold to cross as it is no longer double-digit territory.

The reaction from analysts and economists was cautiously upbeat, but South Africa’s fiscal situation is still seen as fragile. It’s just not as fragile as it was yesterday. 

The big item was that R150-billion that will be drawn from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) of the South African Reserve Bank (Sarb) over the next three years. This is an account held at the Reserve Bank that captures gains and losses on the country’s foreign currency reserve transactions.

This money will be used not for direct spending, but to lower debt issuance. 

That will help to plug swelling budget deficits and contain the growing pile of debt that is a burden on South Africa’s slow-growth economy. And the fact that no more new money is going to be poured down the SOE drain also raises some hope that debt levels can be contained.

“Despite the Finance Minister’s ‘not yet’ comments in his WEF interview, South Africa will — after all — partially utilise the GFECRA to reduce its gross borrowing requirement, This yields debt service savings, and reassures on near-term funding needs. Understandably, markets are reacting positively to this,” said Razia Khan, Chief Africa Economist at Standard Chartered Bank. 

“However, contrary to our expectation, there is no announcement of an all-encompassing fiscal anchor just yet … Second, there is no equity injection for Transnet. However spending, especially social spending will be able to increase — a nod to this being an important election year for the ANC.” 

Rabbit out of a hat

Peter Attard Montalto, managing director at consultancy and research company Intellidex, told Daily Maverick that: “National Treasury has rather pulled a rabbit out of the hat here and confounded overly negative market expectations.

“We were even surprised despite being more positive. There are still deep problems here of too narrow a tax base and spending challenges in so many areas.”

Jee-A van der Linde, senior economist at Oxford Economics Africa, said in a note that it was “Treasury’s turn to get ‘bailed out’.”

Van der Linde wrote: “Government will use a portion of the valuation gains in the GFECRA to help mitigate fiscal risks by reducing borrowing over the medium term. However, to say that South Africa’s fiscal risks have diminished would be a gross misstatement.

“South Africa’s improved fiscal ratios will be welcomed, but the issue of misspending remains unaddressed. The outcome of the 2024 Budget hinged on a few key things; a Transnet bailout would have compromised state finances further, while profits from the GFECRA would see the fiscus improve. The government opted for the easy way and tapped R150-billion of the valuation gains in the GFECRA, while kicking the Transnet matter down the road.” DM