Rand price weak ahead of Medium-Term Budget Speech (MTBPS)

When is the Medium-Term Budget Speech (MTBPS)?

Finance Minister Enoch Godongwana is set to deliver the MTBPS on Wednesday the 26^th October 2022.

What to expect from the MTBPS?

The mid-term budget speech will amend February 2022’s budget review and set the stage for February 2023’s full renewed budget presentation.

Included in the speech will likely be further allocations to ailing state owned entities (SOEs), a commitment to fiscal consolidation, plans to address distressed local municipalities and a perhaps more conservative outlook towards growth and future revenue collection, amidst what is a challenging economic environment at present.

SOEs

Updates to the Medium-Term Expenditure Framework (MTEF) should see further allocations to State Owned Entities (SOEs) such as the Post Office, Denel and Transnet. The Post Office has already highlighted liquidity constraints and requested R1.6bn in support from Treasury. Denel is also in need of financial aid and Transnet’s current infrastructure and staffing issues are providing further pressure to local economic growth.

SANRAL liquidity concerns pertaining to weak collections from the e-toll project, requiring urgent policy decisions to be made.

Eskom will also be a focal point with ring fenced government support and commitments (including debt transfer plans) closely monitored.

Revenue overrun

Better than expected tax collections and the recent surge in commodity prices suggest a revenue overrun of between R80bn and R110bn. This has equated to an improved fiscal position for the country and its debt levels relative to GDP (gross domestic product). The benefits thereto are however expected to fade from support and commitments to the likes of Eskom and pressures to the public sector wage bill.

The country’s gross debt to GDP is forecast at around 70% for FY 22/23 but could shift higher thereafter.

The Rand – Technical View

The long-term trend for the USD/ZAR remains firmly up (dollar strength / rand weakness). In the short term we see the price having produced a tentative upside break of the consolidation between levels R17.90/$ (support) and R18.40/$ (resistance).

The long-term trend favours keeping a long bias to trades on the currency pair now. The upside break suggests a short-term continuation of the longer-term trade. R18.70/$ and R18.80/$ become the next upside resistance targets from the breakout and suggested trend continuation.

If the breakout loses momentum and instead, we start to see a correction in the USD/ZAR price action, we would not be looking to short the move lower, but rather waiting for the pullback to end before reinstating long positions. That is provided that the R17.50/$ level remains unbroken support.