As the temperature in Cape Town soared to 36 degrees Celsius on Monday, South African Finance Minister Tito Mboweni may be feeling heat of a different kind.
Mboweni, barely two weeks into the job, must reassure investors and rating companies in his mid-term budget speech in the city on Wednesday that he has the budget deficit under control, while finding money to boost an economy that fell into recession in the first half. Investors seem confident he can: bond yields fell to two-week lows Monday and the rand gained, while traders curbed bearish bets on the currency.
Analysts from Nedbank Group Ltd., Citigroup Inc. and Informa Global Markets are predicting a rally in the rand, even as the projected budget shortfall is seen wider than the February estimate of 3.6 per cent. As long as the gap remains below four per cent, sentiment won’t sour toward the rand, according to Mehul Daya and Neels Heyneke at Johannesburg-based Nedbank.
“The market is quietly optimistic about the budget,” said Gordon Kerr, a fixed-income trader at FirstRand Bank Ltd. in Johannesburg. “Everyone expects the deficit to widen from February, but tax revenue has surprised to the topside. And Treasury will keep to the fiscal consolidation story because they can’t afford not to.”
The premium of options to sell the rand over those to buy it versus the dollar in the next week declined 3 basis points on Monday to 2.3 per centage points, down from as high as 5.8 last month. One-week implied-volatility fell 78 basis points to 18.5 per cent, suggesting options traders expect price swings to moderate. The rand weakened 0.4 per cent to 14.3837 per dollar by 8:35 a.m. in Johannesburg Tuesday after advancing 0.7 per cent the previous day. Yields on benchmark bonds due December 2026 were little changed at 9.15 per cent after falling six basis points on Monday.