Nedcor says Wednesday’s Budget is pro-growth, with an aggressive mix of tax cuts and expenditure increases that should help to boost consumer and business confidence in the year ahead.
“This should help to buoy domestic economic activity at a time when the global economy appears to be fading. Despite the growth stance, the deficit target, albeit higher than anticipated, still remains fiscally responsible,” the country’s largest banking group said.
While the borrowing requirement and the net supply of paper to the bond market would increase, it remained at manageable levels. The impact of the budget on the bond market was therefore expected to be relatively neutral as most institutions should be willing to take up the additional supply of bonds, it said.
“As the year progresses, bond yields are expected to be more sensitive to future movements in inflation and short-term interest rates than technical factors stemming from the supply of paper to the market.
“However, there is a real risk that while the strong budgeted increase in expenditure is likely to be realised, revenue could disappoint for the first time in years,” it added.
“If this scenario materialises, this year’s budget could turn out to be too expansionary, resulting in strong domestic expenditure and increased pressure on the current account of the balance of payments.”
While the good news on the growth front might encourage some capital inflows in the short-term, a widening current account seems inevitable given the current global environment and this could have negative implications for the rand, inflation and interest rates later in the year, Nedcor said.
It added that the implications of the exchange control concessions on the rand were uncertain.
“While the tax and foreign exchange control amnesty on individuals holding funds abroad could encourage a certain amount of cash to return to South Africa, blocked rand holders might also be tempted by the concessions to take funds out, albeit in a controlled manner.” – I-Net Bridge