Executive Summary

After the Budget, our core views are unchanged, as a VAT hike is likely to fuel expectations that fiscal consolidation may be achieved. Growth has been adjusted higher and is now seen at 2.1% in 2020/21. Consolidation measures for 2018/19 have come via tax revenue measures of R36 billion and a reprioritisation of expenditures to maintain the expenditure ceiling. Although expenditure cuts of R85 billion were outlined for the MTEF, these were reallocated to new expenditure pressures like fee-free education (R57 billion).

The budget deficit as a % of GDP will likely compress towards 3.5% in 2020/21, and gross debt/GDP is forecasted to stabilise at 56% in the outer-year. Debt stabilisation is a key precondition for avoiding further downgrades. We believe the budget was successful in communicating the government’s intention of delivering fiscal consolidation, and we believe it will therefore ensure that the Sovereign avoids further downgrades over the medium-term.

The budget did enough to avert a Moody’s downgrade in our opinion, but the Sovereign is not yet out of the woods. Debt metrics improved on the back of better-than-expected GDP growth outcomes for the next three years. In our view, the budget achieved its key goal: To galvanize positive sentiment and boost investor confidence so that the private sector does all the heavy lifting on growth, while the Sovereign fixes its fiscal and institutional affairs. Overall we think this budget will be well-received by both the market and the ratings agencies, but slippage is still a possibility before the next MTBPS and debt stabilization could still be vulnerable.

  • On the rand: Our rand target remains unchanged. We maintain our initial target of 11.30. Tactically, we expect rand weakness on the approach to 12.00 to fade in 1Q18. Rand closer to 12.50 – 13.00 at end of 2018.
  • The SARB: Despite a VAT hike, we believe the Budget should provide room for the SARB to cut the repo rate.
  • On bonds outright: We read the Budget as positive for government bonds. We continue to target 7.80% on the benchmark R186, and 8.75% on the 30-year R2048.
  • We expect Moody’s to keep South Africa’s rating unchanged in March 2018. However, on multi–month view, we taper our expectations.

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