Markets little moved, economists give Budget mixed reviews

The markets knew in advance what 90% of the delayed Budget unveiled on Wednesday would contain, and they reacted accordingly.

The reaction from economists was more mixed, but overall, the consensus was that South Africa is running out of fiscal space as economic growth remains out of reach.

The rand in late afternoon trade on Wednesday was little moved from its levels just before the finance minister spoke, fetching 18.38/dlr.

Meanwhile, the yield on the benchmark 10-year government bond fell 10 basis points to around 10.75% after the Budget was tabled. This would normally be a good sign — bond yields and prices have an inverse relationship — but the move just brought the yield back to where it was earlier in the day.

“The 2025 Budget indicates fiscal slippage and shows how constrained South Africa’s National Treasury is, as faster economic growth remains elusive,” said Jee-A van der Linde, senior economist at Oxford Economics Africa.

“To compensate for a reduced 0.5 ppt increase in the value-added tax (VAT) rate, Treasury cut spending somewhat, borrowed a little bit more, and leaned on private income taxpayers by not adjusting tax brackets for inflation.”

Dr Elna Moolman, Standard Bank group head of South Africa macroeconomic research, said that it was a good sign that the government remained committed to “fiscal consolidation” — economist speak for bringing swelling debt levels under control.

“The single most important feature of this Budget is government’s unwavering commitment to fiscal consolidation, with the debt-GDP ratio peaking imminently (in FY25/26),” said Moolman.

“The Budget is positive for financial markets if it gets enough support from the Government of National Unity (GNU) to be adopted. The Budget is a reasonable compromise between the interests and preferences of the major GNU partners.”

Low-growth trap

All economists noted the elephant in the room: South Africa’s low-growth trap, which means the government has increasingly fewer sources of revenue to tap.

“Sustained weak real GDP growth, in part as a result of an underperforming mining sector, means that the economy is unable to generate sufficient revenue to, amongst others, finance large pro-poor expenditure, as well as a bulging public sector wage bill,” said Hugo Pienaar, chief economist at the Minerals Council South Africa, the mining sector’s main industry body.

“The only way to break the suboptimal cycle of tax hikes or spending cutbacks to frontline services is through higher rates of GDP growth that is inclusive,” he said.

The next big test will be whether the Budget can get through Parliament without the support of the ANC’s biggest GNU partner, the DA.

As Moolman noted, if it gets adopted, financial markets will probably react favourably — or at least not badly.

But if it fails to get through, then the rand will almost certainly tank and bond yields will spike. Watch this space. DM