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Positive Zuma address to help offset rand pressure

Wednesday, 10 February 2016   (0 Comments)
Posted by: Author: Ntsakisi Maswanganyi
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Author: Ntsakisi Maswanganyi (BDlive)

If President Jacob Zuma gives an indication of impending government spending cuts and hints at tax hikes when he delivers his state of the nation address on Thursday, these overtures could offer support to the rand.

This is especially the case in a week when global developments could bring the local currency under pressure, say economists.

Such pressure is expected because of US and Chinese economic data coming out this week.

On Wednesday, Federal Reserve chairwoman Janet Yellen will address Congress and the contents of her speech are expected to have a bearing on the rand exchange rate.

So a meaningful address by Mr Zuma could help offset some of the pressures on the rand.

When weak, the rand stokes up inflation and encourages interest-rate hikes. So any rand strength is welcome as this helps ease the pressure on the Reserve Bank to lift interest rates.

Efficient Group chief economist Dawie Roodt says it is the president’s responsibility to give a glimpse into the budget and outline plans for the year. The budget will be tabled by Finance Minister Pravin Gordhan on Wednesday February 24.

Markets may welcome an announcement on the need to change labour legislation and liberalise trade, however any state spending cuts would the most positive support for the rand, said Mr Roodt.

"If Mr Zuma talks about cutting spending on current expenditure, especially on the wage bill, and hints at tax increases, the rand will do better."

Lefika Securities economist Colen Garrow said that although 2016’s state of the nation address would be more market-moving than previous ones, it was unlikely that Mr Zuma would release any detailed information on the budget.

The address will be watched more closely because of the poor state of the economy, low private sector investment and the unpromising growth in household spending, the mainstay of economic growth in previous years, is decelerating.

Despite recent statements by policy makers over the need for bold steps to grow the economy, an unconvinced Mr Garrow said: "If current policy makers had any plan to steer the economy onto a more sustainable economic path, this would have been flagged to financial markets by now."

Markets were seeking guidance on whether there are any plans to arrest the weakness in the economy and to reverse the recessionary incline it is currently experiencing, said Mr Garrow.

The World Bank estimates that South Africa needs growth in excess of 7% from 2018 to address high unemployment and poverty. This is higher than the 5.4% growth target set out in the National Development Plan.

The Reserve Bank changed its growth forecast to 0.9% for 2016, down from 1.5%. The Bank predicts that South Africa will grow 1.6% in 2017, down from a previous 2.1% forecast.

The International Monetary Fund predicts that the country will experience 0.7% in 2016 and 1.8% in 2017.

Rating agency Moody’s warned last week that weak economic growth and lower tax revenues were credit negative. Many economists have interpreted this to mean that a sovereign credit rating downgrade was possible if growth, and other concerns raised by the rating agencies including a large budget deficit, were not addressed.

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