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Why the mini budget sent the rand nearly 2% weaker

by , 22 October 2015

Yesterday, finance minister Nhlanhla Nene gave his medium-term budget address.

From the time he began his speech to the end of it, the rand lost almost 2% against the dollar.

So why did the currency react so badly?

Let's take a closer look…

The rand weakened sharply

The rand weakened “from R13.27 against the dollar before the mini budget to R13.52 shortly” afterwards, reports Fin24. And it wasn’t all down to the student protests.

A riot ensued outside of parliament, delaying the finance minister’s address by one hour, says Bloomberg, This led police to fire “stun grenades at protesters”.

Of the 31 currencies Bloomberg tracks, the rand weakened the most. As Bidvest Bank’s chief dealer, Ion de Vleechauwer, pointed out, “it’s a sad state of affairs if your finance minister can’t even deliver his budget speech”.

Economist Dawie Roodt explained to Fin24 that there were three reasons for the rand’s fall:

  1. The forecast of “weaker economic growth;”
  2. Weak income; and
  3. Troubled state institutions.

In his mini budget, Nene said that the Treasury expects economic growth to come in at 1.5% for the year, says IOL. This was down from February’s forecast of 2%.

The finance minister revealed that debt was likely to spiral as the “government would have to borrow $4.5 billion from global markets,” says MoneyWeb. This would take debt to almost R2.4 trillion by 2018/2019.

More reasons for the rand’s woes

Chief economist with Economists.co.za, Mike Schussler, told Fin24 that the root of the rand’s fall could due to two things. Either because of the protests or because the mini budget revealed “that there is R7.6 billion less income expected, not much cutting of expenditure and still nothing for the students”.

Fixed income money manager with Investec Asset Management, Malcolm Charles, told Bloomberg that “a lot of the spending increase is on salaries”. This isn’t positive spend.

At time of writing, the rand was trading at R13.52 to the dollar, R15.33 to the euro and R20.84 to the pound.

So not a great day for the rand after the mini budget.

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Why the mini budget sent the rand nearly 2% weaker
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