Immediate market reaction to Budget postponement muted

19 Feb 2025

Market reaction to the non-Budget left some commentators welcoming its postponement while many were wondering what it all meant for the Government of National Unity, for the country and for the cost-of-living crisis.

The delay in the budget speech follows a dispute within the Government of National Unity (GNU) over Finance Minister Enoch Godongwana’s proposed 2 percentage point increase in Value Added Tax (VAT).

“South Africa’s fiscal position means that any additional taxes would place a crushing burden on an already fragile tax base, eroding the purchasing power of all South Africans,” said David Ansara, chief executive of the Free Market Foundation.

“While the uncertainty generated by the last-minute postponement is understandable, the delay affords the Minister of Finance the time to develop a Budget which is better suited to the present economic conditions in South Africa,” Ansara said.

“Instead of increasing taxation or borrowing, Minister Godongwana should focus on radically reducing the size and scope of government.”

‘Wake-up call’

In the absence of fundamental structural reforms to unlock economic growth, South Africa is unlikely to reduce its growing deficit of -5% as well as its projected debt-to-GDP ratio of 75.3% in the 2025/26 financial year.

“South Africa has been sleep-walking off the fiscal cliff. This delay should be a wake-up call to the government to get its finances in order. Rather than hiking taxes, the government should be living within its means and aggressively cutting back on public sector spending,” Ansara said.

Old Mutual wealth strategist Izak Odendaal told Daily Maverick: “Markets don’t like negative surprises. The rand is already a percentage weaker, which in the bigger scheme of things, is not dramatic. The concern is more about the politics of it and less about the actual Budget. Is the GNU on the verge of collapse?”

Odendaal said that based on what he had heard, the draft budget would most likely have elicited a positive market response had it been tabled. “A commitment to fiscal consolidation seems to have been there, demonstrated by a [2 percentage point] VAT increase. From the point of view of the markets, that’s positive because it shows you want to borrow less and reduce the deficit. We already have a narrow tax base – South Africa is close to the point where the economy is taxed to the max with not much room for further personal tax,” he said.

Odendaal said he expected the markets would wait until the Budget was tabled in three weeks, on 12 March, and see how different it was from the ‘first draft’.

“The key thing to remember is that what you and I consider a “good” budget is not the same as what markets think is good. Markets want to see less government borrowing, which means spending cuts that translate to fewer doctors and teachers or raised taxes. The alternative to that would be to keep borrowing, which would freak the market out,” he said.

Market reaction ‘mild’

Investec chief economist Annabel Bishop said the initial market reaction was “mild”.

“Markets are still weighing up the implications of the delay in the Budget. A mild reaction is evident in the bond market, with some worries likely on how the revenue shortfall will be funded,” she said, adding that she did not expect much reaction from the rating agencies.

S&P, one of the three key rating agencies (the other two are Fitch and Moody’s), put South Africa on a positive outlook (indicating the potential for an upgrade from BB-) in November last year.

Bishop pointed out that in its last review of South Africa, S&P removed the large political risk component it previously had for SA – based on the Government of National Unity and upgraded the credit risk outlook to positive.

“The rationale for the outlook upgrade reflects our view that increased political stability … and impetus for reform could boost private investment and GDP growth,” she said.

By 5pm on Wednesday afternoon, the JSE had seen a modest reaction in line with other market indicators and had lost half a percent. DM

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‘Wake-up call’

Market reaction ‘mild’