Mini-Budget puts strain on the Rand - what next?

A rough week for the Rand, with all eyes on the Mid-Term Budget, which is often a trigger for some explosive moves...

And that was exactly what we got, as the Rand went spiraling after Tito Mboweni's very honest budget.

Perhaps too honest, for the likes of investors.

A lot of ideas, a lot of positive sounding plans, but the economic figures were crushing to investor confidence.

Let's review the week, with a focus on what came out in the mini-budget speech, and the Rand's reaction to that.

It was a busy week. Here are a few of the key moments and outcomes:

• Mid-Term Budget - what else was possibly going to be in the #1 spot on our list? A difficult budget to swallow, with lots of key facts and figures becoming public.
• US Tariffs on SA - Steel and Aluminum are some of the key exports from SA, and they have now been caught in the middle of the Trade War tariffs...
• Asian & US market collapse - the Dow and major stock markets endured a midweek collapse...
• Ratings agencies - they are in real focus after this last week, as one would surely expect that Moody's would release some kind of statement after Mboweni's statement...?
• Ramaphosa's investment hunt - in the days following the budget speech, we got an update from how the investment drive was going from the President...

So...

...the first half of the week was great. The Rand roared stronger, giving it prime positioning in view of the Mid Term Budget Policy Statement (MTBPS):

And then it went a bit off course following Mboweni getting started.

In fact, the reaction was so fast, it was clear that it was not even relative to what Mboweni was saying. The Rand had lost more than 12c in value, barely before he had finished introducing himself, greeting all the ministers!

It was just the trigger for some underlying sentiment.

So, where did the Rand end its upward rush?

By Friday, it had touched R14.75, after breaking as low as R14.14 before the budget. A rather sorry state of affairs...

So, what did Mr. Mboweni say, and what do we make of it all?

The speech went something like this:

• Debt - R181bn to be spent this year to service debt, rising to R247bn in 2021
• 2018/19 budget deficit - increase to 4% of GDP. Growing to 4.2% in 2019/20
• SARS - tax revenue short fall will be R27.4bn for 2018/19
• GDP growth - 2018 GDP growth down to 0.7%, with 1.7% in 2019 and 2.1% in 2020
• Gross debt to GDP - stabilizing to 59.6% of GDP by 2023
• SOEs - More annual bailouts: SAA to receive R5bn, SA Post Office receives R2.9bn, and SANRAL receives R5.8bn.

VAT: White flour, cake flour and sanitary pads are now zero-rated

Mboweni made it clear. This is crossroads for SA, economically. It is a very finickity and difficult situation for a new finance minister to handle, and he is trying his best to get his head around it.

But, with those types of economic figures, it is clear that there is still a long road ahead.

And that is the other half of the budget speech - what is planned to try turn it all around.

Which brings us to the economic stimulus plan:

This is where the positives lie, with government’s renewed drive to stimulate the economy:

• Growth enhancing economic reforms, such as the revised Mining Charter, Visa regulation amendments, and restructuring the electricity sector
• An Infrastructure fund
• Public spending to be used to support growth and job creation
• The reformation of state owned entities
• Revived management at board level
• Auditor-General focused on irregular spending and full audits
• Eskom to present turnaround strategy to Government in November
• SAA find R400 Million in procurement savings

So, plans are in place, but as always - the plans need to come into effect, not just be planned. But what is needed is less government involvement - not more!

And such a poor showing of economic figures means that the ratings agencies are again breathing down the neck of SA's credit rating.

Moody's had given a thumbs up to SA earlier in the week, confirming that while there were issues, there were a number of positives which were sufficient for the current credit rating to be maintained.

However...

...one would expect there to be some response to what was announced.

Fitch ratings came forward and confirmed SA's credit "junk status" rating, saying that the impact of re-prioritized spending has had very little impact - which is correct.

But the big one is still Moody's - and they came out to say on Friday that the "budget speech was credit-negative"... At this stage, more a warning shot than anything else, and it would appear that there are 6 months for things to turn around before the next credit review!

There were a few more important headlines during the week:

• Ramaphosa's update on the investment drive was quite something. He lauded the success of the drive so far, saying he has been "overwhelmed" by the interest in the investment conference which was held in JHB. "The investment strike by business is over!", were the words that he used following the conference, with R290bn committed to the South African economy over the next 5-10 years. In addition to that, he revealed that SA has pledges of R400bn more from countries he and his investment envoys have visited over the last 6 months! Among these were pledges to invest more than USD 8bn (approx R116bn) on Friday, including a USD 6bn (approx R87bn) commitment from Anglo American. This is crucial to keeping the ratings agencies from downgrading SA further.
• US Tariffs on Aluminum and Steel have been damaging for SA, and this does not seem to be changing anytime soon. SA applied to the US for an exemption from the tariffs, and the result of that application came back this last week: negative. This makes it very difficult to stay competitive, and does not improve SA's trade balance either...
• US stock markets and Asian markets struggled during the week, with the Dow Jones (DJI) dropping 1000 points. Along with that the Asian markets suffered across the board. It has been a controversial couple of weeks in the US, with the Saudi Arabian situation playing out, and then all this internal conflict with the pipe bombs being sent to key political figures.
• ECB's interest rate decision came through on Thursday, and the rates were left unchanged, as expected. There were more economic events such as US Goods Trade Balance, which widened further... despite the efforts to reverse this trend by Trump. However, on Friday, the US GDP came through at a fantastic 3.5% growth, showing more strength to come in the US economy.

When the Rand hit 14.75 on Friday, it seemed like the week was going to be a one-way street, but the local currency showed it had some fight left and managed to pull back to end the week around 14.59 ... a nice pullback.

As we enter the last week of October, the Rand started it on the front foot to hit 14.42 but has since lost some ground.

This week is likely to be an interesting one, with several high impact fundamental events that could provide some triggers for large moves.

Based on Friday's updated forecast, we have two possible scenarios playing out in terms of Elliott Wave patterns, with one being favoured over the other.

The movements over the past day suggesting this preferred wave count is likely playing out, BUT we still need some key levels to be triggered in order to confirm the market's trajectory for the next few weeks.

To your success~

James Paynter