Various experts have various opinions about the Medium-Term Budget Policy Statement (MTBPS) that minister of finance, Enoch Godongwana delivered on Wednesday but looking at the rand, there was no confusion about the MTBPS: the local currency strengthened to below R17/$ for the first time since February 2023. The rand was trading at R17.13/$ this afternoon.
According to Moneyweb, the rand gained as much as 0.8% on expectations that the South African Reserve Bank (Sarb) will hold interest rates higher for longer to subdue price increases.
Bianca Botes, director of Citadel, also noted the rand strengthened to under R17.00/$ after Godongwana’s MTBPS, where he announced a 3% inflation anchor and R1 trillion in infrastructure commitments across three years, while also providing a solid case of fiscal consolidation and prudency.
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Positive global sentiment worked for the rand
Busisiwe Nkonki and Isaac Matshego, economists at the Nedbank Group Economic Unit, say the rand reached its highest level since 2023 this week, buoyed by positive global sentiment after the Senate agreement to end the longest US Federal government shutdown in history.
“The local unit also drew support from the positive local mood after National Treasury confirmed the lowering of the inflation target, erasing a policy uncertainty that had gripped local markets since July when the Sarb announced its new preferred inflation level.”
They also noted that Treasury has a slightly better fiscal trajectory, which affirms its commitment to stabilising the public debt. In late-morning trading on Thursday, the local unit briefly touched R16.95/$ after opening the week at R17.15.
Nkonki and Matshego say although emerging market currencies were broadly firmer, the rand was among the best performers on Thursday, only to surrender the gains and trade around R17.10/$ as renewed global market jitters emerged.
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Rand dipping below R17/$ shows financial markets welcomed MTBPS
Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER) says financial markets welcomed the MTBPS, with the rand dipping below R17/$ on Thursday morning. “Bond yields moved lower, while the CDS-spread (a measure of default risk) declined notably.
“This could well be the start of a more virtuous cycle (and all this makes achieving a 3% target easier), but – and I realise I sound like a broken record here – to sustain the momentum, we need to see rapid implementation of structural reforms to lift confidence and investment.”
Albert Botha, head of fixed income at Ashburton Investments, says a lower inflation target today raises the probability of lower policy rates tomorrow. “On the currency front, a credible disinflation path narrows the inflation differential between us and our primary trading partners, while also cushioning the rand against global dollar swings.
“Yet, in a world where US interest rates drift down only gradually and trade frictions persist, the strength of the rand should be seen as cyclical relief than a long-term structural shift.”
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