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The Budget, the Ratings Agencies and the Rand

The 2018 Budget Speech by Finance Minister, Malusi Gigaba has been better received by the public, on a relative basis, than the mid-term budget was, with the suggestion that (in accompaniment with recent political events) it may just be enough to appease ratings agencies in the near term and survive the upcoming review by Moody’s Investor Relations.

The budget plan suggests an R85bn cut in expenditure over the next three years, while key proposals for increased collections are; a move from 14% in Value Added Tax (VAT) to 15% and below inflation increases in personal income tax remittance.

The fiscal discipline in containing (reducing) expenditure over the next few years combines with recent moves by President Cyril Ramaphosa to address ailing State Owned Enterprise (SOE), Eskom. These have been highlighted concerns by ratings agencies and government is now showing real intent in addressing these issues.

Moody’s, the last of the three major ratings agencies to hold an investment grade rating on South Africa’s local currency debt is expected to conclude its review between now and the 23rd of March 2018. Broad expectations are that South Africa may have just done enough to buy another 6 months grace from the ratings agency, although it appears unlikely to shrug off the negative outlook.

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Technical View

The budget, ratings agencies and the rand

On the release of the 2018 budget, the rand found continued strength against developed market and emerging market currency peers, evidencing the domestic catalyst for strength.

From a charting perspective, the long term trend for the USD/ZAR currency pair is down (Dollar weakness / Rand strength). The USD/ZAR pair currently trades in a near term range between levels R11.55/$ and R11.80/$. The pair is looking as if it is reversing off the resistance level of this range (R11.80/$). With this in mind we favour a move back to R11.55/$, while a close below this level suggests the continuation of the longer term downtrend with the next support target considered at R11.30/$. A close above the black trend line on the chart above (currently R11.90/$), would consider the failure of the bearish near term assumptions.