South African financial markets are generally expected to react positively when Finance Minister Trevor Manuel unveils his 2007/08 Budget on Wednesday, analysts say, with the JSE in particular seen benefiting.
“Chances are that whatever the minister does, it will be good for equities,” said Efficient Group chief economist Dawie Roodt. “If there is an increase in social expenditure, it will filter through to consumption-centred stocks such as retailers.”
Another, more likely, possibility is an increase on spending on infrastructure, which would benefit construction companies. “We could see a lot of extra capital expenditure,” Roodt said.
The market will be looking for possible changes to company taxes, which would benefit equities too.
ETM market analyst Monica Ambrosi noted that there has been talk of the budget being friendly towards business and facilitating business.
Manuel could either decrease the level of tax on companies or do something related to secondary tax on companies — or a combination of the two.
When it comes to the rand, Ambrosi said the market will be watching to see if Manuel does anything to relax exchange controls. However, he is unlikely to scrap these completely. The current gradual approach to abolishing exchange controls is likely to continue.
Roodt believes that there is a good chance the rand will react positively to the budget because it will be a confirmation of fairly good fiscal policy. He does not expect much reaction to the budget from the bond market, however.
“I think it is priced in already and I don’t think the bond market will react,” he asserted. “If anything, it can potentially react negatively. For example, if there is a large cut in company tax, the bond market will react negatively because government will have to borrow more. But I don’t think this will happen.”
While Manuel had forecast a small deficit of 0,4% of GDP in his Medium-Term Budget Policy Statement in October, Roodt is confident that instead there will be a small surplus of about 0,3% of GDP.
“Manuel indicated there would be a budget surplus in the next fiscal year and that could be likely in the current year. In that case, bonds would strengthen as it is going to affirm the issuance of bonds going forward [will be small],” said Ambrosi.
Roodt, however, feels that the market has already factored in such a surplus.
Ambrosi added that while people are already used to the idea that a surplus is on the horizon over the next three-year term, and from that perspective the budget is not expansionary, there will be increased spending plans coming through.
“So I think it will be well received,” she said. — I-Net Bridge