South Africa’s currency continued to gain ground, trading below the R18.50 mark following confirmation from the National Treasury that it would present a revised version of the national budget later this month. This development has provided a fresh boost to market sentiment, with the prospect of a more unified fiscal strategy lending support to the rand’s performance.
Key Takeaways
- Budget 3.0 Calms Market Jitters: The announcement of a third version of the national budget has provided a temporary boost to investor confidence, strengthening the rand and lifting equity indices as markets anticipate fiscal clarity.
- Coalition Instability Eases, But Fragility Remains: Tensions within the Government of National Unity, particularly threats from the DA to exit the coalition, have eased for now—but underlying fractures still pose risks to long-term fiscal planning.
- VAT Policy U-Turn Signals Deeper Challenges: The reversal on the proposed VAT hike, following political and legal pressure, highlights the difficulty of pushing through revenue-raising measures in a weak economy with a divided legislature.
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Third Budget Attempt Scheduled Amid VAT Disputes
Finance Minister Enoch Godongwana confirmed on Wednesday that a third iteration of the national budget — informally dubbed “Budget 3.0” — would be tabled before Parliament on 21 May. This move follows an extended period of disagreement among political factions, primarily centred around proposals to increase the Value-Added Tax (VAT) rate. The previous attempts to finalise the national budget were met with considerable resistance, stalling progress on crucial fiscal planning. This deadlock had cast a long shadow over fiscal certainty, spooking investors and raising concerns over possible credit rating downgrades if no resolution was reached.
Rand Advances on Unity and Budget Prospects
The rand demonstrated notable gains in the first trading session following the Minister’s announcement. After closing at R18.89 against the US dollar on Wednesday, the local currency improved to R18.45 by mid-morning on Friday. While broader geopolitical factors — including fluctuating trade policies from the United States, particularly under the leadership of President Donald Trump — also influenced the currency’s movement, analysts pointed to signs of renewed political cooperation within South Africa’s Government of National Unity (GNU) as a primary driver of the improved investor confidence. Foreign exchange desks reported heightened rand demand across Asian and European trading sessions, with traders positioning themselves ahead of what some anticipate will be a more fiscally responsible budget draft.
Coalition Tensions Ease After DA Threats
Tensions within the GNU had intensified in recent weeks, with the Democratic Alliance — the coalition’s second-largest party — signalling its potential withdrawal from the multi-party agreement. Such instability had cast doubt over the government’s ability to pass essential legislation. However, signs of rapprochement between the coalition’s major stakeholders have helped calm markets. Traditionally, political uncertainty leads to capital flight and market downturns, yet in this case, renewed cooperation has instead fostered a more stable investment environment. Behind closed doors, sources within the ruling alliance suggest that intense negotiations were held late into the night, with fiscal concessions and policy compromises tabled to retain the DA’s involvement.
South Africa’s equity markets also responded favourably to the developments. The Johannesburg Stock Exchange’s All Share Index was up by nearly one percent during Friday morning trade, indicating growing optimism among investors that the latest budgetary efforts may succeed where previous versions had failed. Banking and retail stocks led the rally, with traders viewing fiscal clarity as a green light for earnings growth and consumer stability.
Rand Rebounds from March Highs
Earlier in the week, Investec’s chief economist, Annabel Bishop, observed that the rand had returned to R18.60 against the dollar — in line with their first-quarter forecast. This represents a substantial recovery from the R19.93 level recorded in early March, which had been triggered by speculation that the DA might exit the GNU. Those rumours had unsettled investors and cast doubt on the country’s near-term fiscal direction. At the time, bond yields spiked and equity flows reversed, as market watchers feared a repeat of the 2017 crisis that saw abrupt Cabinet reshuffles and fiscal volatility.
Budget Revisions Reflect Policy Uncertainty
The February version of the national budget was rejected following sharp criticism of a proposed VAT increase from 15% to 17%. A revised plan was submitted in March, gaining approval by a narrow margin. This second version adjusted the VAT rate to a proposed 15.5%, forming the basis of the fiscal framework. However, ambiguity around the application of the 0.5 percentage point increase — particularly whether it would apply at point-of-sale — sparked further political discord. The confusion led to accusations of bad faith and legal brinkmanship, with opposition parties accusing Treasury of bypassing due process.
Legal Challenge Prompted Policy Reversal
Before the Western Cape High Court could deliver judgment on a challenge jointly brought by the DA and the Economic Freedom Fighters (EFF), Finance Minister Godongwana reversed course. He announced that the VAT rate would remain unchanged and committed to submitting new legislation to maintain the current rate. This abrupt change in direction reflected the growing difficulty in navigating a fragmented parliamentary environment.
Tight Fiscal Outlook Ahead
Bishop later commented that South Africa is set to see a third budget revision, which is likely to include reductions in public spending. These anticipated cuts stem from the government’s inability to secure consensus on higher taxation measures, a challenge compounded by weak economic conditions and the threat of subdued growth. The fiscal space remains limited, and any additional revenue is expected to be consumed by existing expenditure commitments, with broader consolidation efforts facing delays.
Departments have reportedly been instructed to prepare for spending ceilings and programme deferrals, particularly in infrastructure and wage-intensive areas.
Global Factors Also Buoy Local Currency
Adding to domestic political factors, the rand has gained support from a relatively weaker US dollar, as global investors search for assets offering higher yields. This has further contributed to the currency’s strengthening, offering a temporary reprieve from recent volatility.
Conclusion
The announcement of Budget 3.0 appears to have stabilised both political discourse and financial markets—at least for now. The strengthening of the rand and modest rise in equities suggest renewed optimism that National Treasury can steer fiscal policy through a highly fragmented political environment. However, the abrupt reversal on VAT increases and the persistent internal strains within the coalition reveal that South Africa’s path to budget certainty remains narrow and fraught with compromise. The coming weeks will be critical in determining whether this temporary calm translates into long-term credibility and stability.
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