South Africa and the Rand: On the lookout for an (in)credible budget

The stakes are high as South Africa's government tries to stave off a downgrade from rating agency Moody's.

The National Treasury has warned that gross debt to GDP will increase from 61% to more than 80% in the next decade, without fiscal changes.

Finance Minister Tito Mbeweni says the government is looking at ways to stabilise debt (as a percentage of GDP). But he faces challenges.  

First, the coronavirus outbreak has dampened the likelihood of an economic recovery. Second, high inequality and unemployment rates (29%) limit the government’s options. 

The budget is just one of many challenges. USD/ZAR dipped to 14.00 at the start of the year as hopes grew for a global recovery, only to surge now to 15.20 as the effects of coronavirus spread beyond Chinese commodity demand to global risk assets. 

If the South African government fails to deliver a tight enough budget (triggering a Moody’s downgrade and enforced sales of government bonds) or global equity markets take another big leg lower on virus concerns, 16+ levels in USD/ZAR beckon.