Supplementary Budget 2020

SA assets advance as budget seen averting junk status

Johannesburg - Government bonds rallied, sending the yield below 8% for the first time in three years, and the rand and stocks gained as the budget convinced most investors the country is doing enough to stave off another credit-rating downgrade.

With Moody’s Investors Service poised to lower the country’s local-currency credit rating to junk, investors were looking for evidence the government is willing and able to curb debt and trim the budget deficit under the leadership of newly elected President Cyril Ramaphosa.

They got it.

Debt is projected to stabilise sooner and at a lower level than previously forecast, while the fiscal shortfall is seen narrowing over the next three years, the National Treasury said in its budget review.

budget cheer

“The market feels that the budget will be good enough to stave off a downgrade by Moody’s,” said Gordon Kerr, a fixed-income analyst at Rand Merchant Bank in Johannesburg.

The currency climbed 0.8% to R11.64/$ by 17:00 in Johannesburg, the most among major currencies tracked by Bloomberg. Yields on benchmark government notes due December 2026 fell 12 basis points to 7.99%, the lowest on a closing basis since May 2015.

The FTSE/JSE Africa All Share index closed 1.5% higher and the cost of insuring the nation’s debt against default over five years extended a drop after the budget to 143 basis points.

Gigaba’s fiscal plan also spurred optimism in the options market. Traders adjusted their positions to favour the rand more than before, sending the one-month implied volatility tumbling the most in two months on a net basis. The 25-delta risk reversal, the balance between bearish and bullish volatilities, fell toward the lowest in more than a month.

Budget bulls

The budget “looks like a safe and steady approach”, said Julian Rimmer, an emerging-markets trader at Investec Bank in London. “It was a potential banana skin that’s been avoided and this looks to me like exactly the kind of slightly more conservative, stable, playing-it-steady approach that the markets were hoping to see from Ramaphosa."

The rand has advanced 12% since Ramaphosa was elected as leader of the ruling African National Congress in December, setting him on a path to become the country’s president when Jacob Zuma resigned last week.

Growing investor confidence has resulted in currency strength and lower borrowing costs, which together with spending curbs enabled the government to target a lower fiscal shortfall, Treasury said on Wednesday.

Ramaphosa has pledged to revive an economy that is emerging from its second recession in a decade. Foreign investors bought the most South African bonds on Tuesday since October 2012, and have purchased local stocks for the past 10 days, Johannesburg Stock Exchange data show.

“It’s a decent budget in a very difficult environment; we’re still hoping that more changes will be implemented, more than discussed,” said Owen Nkomo, the chief executive officer of Johannesburg-based money manager Inkunzi Wealth Group.

“We’ve done a lot of talking. It’s time to actually implement.”

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