Rand Weakens as Rioters Disrupt Nene Budget Seeing Slower Growthby
Rand leads declines among emerging market, major currencies
Police fired stun grenades at protesters at parliament
The rand weakened as a riot outside South Africa’s parliament disrupted Finance Minister Nhlanhla Nene’s mid-term budget, where he painted a gloomy picture of slowing growth and wider fiscal deficits.
The currency of Africa’s most industrialized economy tumbled 1.8 percent against the dollar to the lowest level in more than a week as Nene continued reading his mid-term budget to lawmakers in Cape Town on Wednesday while police fired stun grenades at protesters outside parliament. The rand declined the most among 31 emerging market and major currencies tracked by Bloomberg. Yields on bonds maturing in December 2026 jumped the most since Aug. 24.
“It’s a sad state of affairs if your finance minister can’t even deliver his medium-term budget speech,” Ion de Vleeschauwer, chief dealer at Bidvest Bank Ltd., said by phone from Johannesburg. “The stuff that he tells there is obviously not good at all; its slow growth, trying to curb the spending. You don’t have to be a rocket scientist to figure out that we’re in for a really, really, really tough time economically.”
University students, who are demanding more money for education and lower tertiary fees, clashed with police and opposition lawmakers were ejected before Nene began delivering his mid-term budget. Nene, 56, began his speech 40 minutes later than scheduled. The National Treasury cut its growth forecast for this year to 1.5 percent from 2 percent, predicted fiscal deficits will widen from next year and will boost borrowing to compensate for lower tax revenue.
The rand dropped to 13.5327 per dollar by 4:29 p.m. in Johannesburg, the lowest on a closing basis since Oct. 13, and extending losses this year to 14 percent. Yields on the nation’s 2026 notes jumped 15 basis points to 8.42 percent, the highest since Oct. 1. Rates on South Africa’s $1.5 billion of notes due January 2024 jumped 12 basis points to 4.43 percent.
Nene had little to offer the protesters as he struggles to balance support for a sluggish economy while safeguarding the nation’s credit rating as it hovers near junk. South Africa can’t risk another rating downgrade, given that interest payments on debt are growing faster than any other expenditure item and make up almost 10 percent of government spending.
Gross government debt will probably increase to 49 percent of gross domestic product in the year through March 2016, higher than the 47.3 percent forecast in February, the National Treasury said. It projects the ratio will stabilize at below 50 percent of GDP over the next three fiscal years.
The government is set to borrow 519.5 billion rand ($39 billion) in the three years through March 2018, or 47 billion rand more than was targeted in February.
“Any increase in financing requirements is going to weigh heavily on the bond market, which has been battling to digest the bonds as it is, and now, especially in the further out years, it’s quite a big change in the funding requirements, not what the bond market wanted to see, that’s for sure,” Malcolm Charles, a fixed-income money manager at Investec Asset Management, said by phone from Cape Town.
To close the budget gap, the government is considering raising taxes in the next three years, possibly from increasing value-added taxes and a wealth levy. Any new measures will take into account the weak economic environment, said Ismail Momoniat, a deputy director general in charge of tax at the National Treasury.
“A lot of the spending increase is on the salaries,” Charles said. “It’s not as if it’s on job creation, or something positive like infrastructure spend or something like that that would have ramifications into the growth numbers. Not a great budget.”