When Minister of Finance Trevor Manuel unveils the 2005/06 Budget on Wednesday, he will be closely watched by South African financial markets. However, with major surprises unlikely, market analysts are divided on how much effect the Budget is likely to have.
T-Sec economist Mike Schussler said that while the market already has a fair idea about what the Budget will contain, the importance is in the finer details.
He explained, for example, that the market will be looking to the size of the Budget deficit. If it comes down due to an expected overrun in government revenue in excess of R10-billion — and is lower than projected in the Medium-Term Budget Policy Statement’s estimate of more than 3% of gross domestic product (GDP) — this could be positive for long bonds and the interest-rate market.
It would also making a cut in the repo rate more likely when the South African Reserve Bank’s monetary policy committee next meets in April.
“Everyone will be waiting to see if there is any tax relief on individuals and companies. People earning between R60Â 000 and R150Â 000 are carrying a lot of the load in the economy,” Schussler added. He explained that such tax relief could benefit retailers and banking stocks.
He noted that President Thabo Mbeki had spoken of increased infrastructural spending in his State of the Nation address earlier this month and construction companies are looking to see where this spending will take place.
Dawie Roodt, chief economist at the Efficient Group, offered similar views.
He said that the capital market will be looking at the amount of paper that is going to be issued. The equity market will look at things such as changes to value-added tax (VAT) — which he does not expect, personal income tax — which he does expect, and changes to some of the small company taxes.
“The [equity] market will look at taxes in general and … the expenditure side,” he said.
Increases in social grants, for example, could benefit retail shares, while spending on infrastructure could lift shares in construction companies.
However, Roodt emphasised that the effect on the equity market will not be as immediate as that of the bond market.
“Analysts need time to see what the impact on equities will be, so it takes a longer time to react,” he explained.
When it comes to the rand, Roodt said the market could react to relaxation of forex control regulations. He believes the minister not only has room to abolish forex controls on individuals, but that this move would be fair, given the amnesty given to those who had taken money offshore illegally.
On the funding side, if the government announces plans to borrow money overseas rather than locally, this could support the rand in the short term, as it would lead to a capital inflow.
Roodt asserted that while the market will be watching the Budget, its impact is not going to be what it was a few years ago.
“In the past, the Budget was determined by policy. Today it is determined by what is happening in the economy,” he said. As the economy is getting stronger, and things such as VAT receipts are improving, the Budget is getting closer to the economy.
Roodt added that the current “rolling Budget”, with the Medium-Term Budget Policy Statement and the market having the main numbers for three years, is also taking away a lot of market uncertainty.
Sasfin market commentator David Shapiro isn’t expecting any fireworks from the JSE Securities Exchange as far as the Budget is concerned.
“I don’t think the market is discounting anything,” he said. “If anything, there might be a bit given to social welfare, which will trigger demand at the bottom end of the market, which is more food-oriented than DVDs, motor cars, etc. This might benefit Shoprite, Pick ‘n Pay and so on.”
He said that while it is premature to speculate on changes to exchange controls, any relaxations would likely be superficial and largely ignored.
“Even if exchange controls on individuals are abolished, it is unlikely to shake the world,” he said, noting that there are plenty of opportunities for individuals to invest offshore already that are not being taken advantage of because overseas markets have little attraction for local investors at the moment.
However, Schussler cautioned against underplaying the Budget’s importance. While it no longer contains the major surprises that it did a decade or so ago, it nevertheless could contain surprises and it remains a “huge occasion”. — I-Net Bridge