South African markets and country-specific exchange traded fund strengthened as traders look to the first budget plan under new leadership.
The iShares MSCI South Africa ETF (NYSEArca: EZA) added 1.9% Wednesday.
Traders and analysts were optimistic about the emerging country’s outlook after President Cyril Ramaphosa, who took office last week, revealed the first budget, Bloomberg reports.
“The bond market likes it, the currency market likes it, and therefore the equity market will like it eventually too,” Julian Rimmer, an emerging-markets trader at Investec, told Bloomberg. “This looks to me like exactly the kind of slightly more conservative, stable, playing-it-steady approach that the markets were hoping to see from Ramaphosa.”
Finance Minister Malusi Gigaba assuaged investors that the government would avoid another downgrade to junk and outlined plans to raise value added tax, boost revenue and narrow this fiscal year’s budget deficit from initial forecasts.
The higher tax rate will add another 36 billion rand, or $3.1 billion, in the year through March 2019, along with budget cuts to total 85 billion rand over three years. The National Treasury projects that the changes, with an improved economic growth outlook, could diminish the budget deficit to 3.6% of GDP in the fiscal year ahead, compared to 4.3% now.
“The market feels that the budget will be good enough to stave off a downgrade by Moody’s,” Gordon Kerr, a fixed-income analyst at Rand Merchant Bank, told Bloomberg.
Moody’s Investors Service will decide by the end of next month whether to lower the country’s local-currency credit rating to sub-investment. Investors, on the other hand, were hoping that Ramaphosa would curb debt and cut down the deficit to strengthen the country’s credit rating outlook.
““It’s been a positive market reaction as one would expect as both the budget deficit and the stock of debt as a percentage of GDP have been revised lower compared to the medium-term budget policy statement,” Cristian Maggio, the head of emerging-markets strategy at Dominion Bank, told Bloomberg.
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