Markets were muted in their reaction to the budget speech on Wednesday with the rand firming marginally in early evening trade and the JSE paring some of its earlier losses.
Analysts said there were no real surprises and much of what Finance Minister Pravin Gordhan said was already priced into local markets.
Property entrepreneur Lew Geffen said that the budget speech was in line with President Jacob Zuma’s message of economic transformation in the state of the nation address.
"Gordhan uttered the word transformation about 50 times in his 29-page speech," he said.
Although the budget speech appeared to have little effect on the market, the JSE all share did weaken on the day. After trading 0.89% lower at 52,119.19 points at midday, it was 1.19% lower in the mid-afternoon before recovering slightly toward the close to end the day 0.95% weaker at 52,088.60 points.
The stronger rand caused the resources and gold indices to retreat more than 2% and platinum stocks were just under 1% weaker.
GDP growth projections of 0.5% for 2016, rising to 1.3% in 2017, remained as previously forecast by the Treasury. These appear to be having an effect on the retail sector of the JSE.
"Retail businesses were unlikely to see a significant increase in sales in the next year or two," said Retail Capital analyst Karl Westvig.
Increases in the top marginal tax rate as well as the dividend withholding tax would put pressure on the motor vehicle and luxury goods sector, he said.
The rand was between R13.08 and R13.14 to the dollar during Gordhan’s speech.
Although spiking to R13.1769 in the late afternoon, the rand quickly recovered to R13.11 before gaining further to R13.08 from Tuesday’s R13.14.
Bonds tracked the rand’s movement for most of the day with the benchmark R186 bid at 8.72% from 8.79% previously.
Before Gordhan concluded his address, the bid had weakened marginally to 8.735% and remained there for the rest of the day.
Analysts said that there was little in the budget that would point to an obvious downgrade by rating agencies in June. "The main risk was that investor-friendly Gordhan could be replaced," said Capital Economics analyst William Jackson.
Jackson said the spread of South African bonds in the benchmark emerging-market bond index was higher than for similarly rated countries. "This suggested that the bond market may already be pricing in a downgrade," Jackson said.
Analysts said that Gordhan clearly faced a dilemma as tax revenue growth, for the first time since 2010, did not make up for the expected subdued economic growth.
Acting too quickly to reduce the budget deficit could hamper service delivery, delay economic recovery and compromise tax revenue collection, the Budget Review said.
But the review did warn that significant slippage against fiscal targets could well result in credit-rating downgrades, interest-rate increases and capital flight.
Against this background, Gordhan should be praised for striking the correct fiscal balance in this year’s budget, said Wits economic academic Kenneth Creamer.
"Gordhan understands that fiscal rectitude is necessary for the growth and transformation of SA’s economy."
This could support the market over the longer term, he said.
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