Markets react to FinMin Godongwana’s 2025 budget

Finance Minister Enoch Godongwana delivered his first budget under a multi-party Government of National Unity (GNU) in South Africa amid global uncertainty and trade tensions. The proposed budget aims to prioritize fiscal consolidation while also investing in infrastructure and supporting vulnerable households. A CNBC Africa interview with Ricardo Smith, the Chief Investment Officer at Absa Investments, provided insights into the key takeaways and implications of the budget. Smith highlighted several key points from the budget proposal. He noted that while the cost of servicing debt is no longer the fastest-growing expenditure item, economic development has now surpassed it. There was some slippage in the expected debt stabilization target, which is now projected to be at 76.2% of GDP. From a capital market perspective, the budget received a favorable response as bond yields remained steady. However, from a consumer perspective, there are concerns about inflationary pressure due to limited relief on personal income tax and moderate VAT increases. Furthermore, social grant increases have been significantly reduced, putting additional strain on vulnerable households. When discussing the overall impact of the budget, Smith highlighted the need for sustainable long-term solutions. While short-term revenue sources and expenditure cuts have been utilized, they may not be viable in the future. Smith emphasized the importance of efficiency in government operations, reducing fiscal leakages, and optimizing capital allocation within state-owned enterprises to drive sustainable reforms. Looking at the risks to the fiscal outlook, Smith expressed caution regarding spending projections, particularly around grants and the wage bill. Supporting state-owned enterprises remains a crucial but contentious issue, given the essential services they provide. The budget's success hinges on parliamentary approval, especially concerning spending decisions. The uncertainty surrounding the budget implementation could impact financial markets' stability in the short term. However, Smith viewed the ongoing debate as healthy, emphasizing the importance of accountability and effective governance in executing the proposed measures. He stressed the need for concessions and collaborative efforts to address opposing views within the parliament. Reflecting on the budget's potential room for expenditure cuts or revenue adjustments, Smith highlighted the limited scope for significant changes. With revenue forecasts often falling short and constraints on spending adjustments, tough decisions on government expenses and fiscal leakages are essential for long-term fiscal sustainability. Regarding the social relief distress grant (SRD), Smith noted the need to transition from short-term relief measures to sustainable developmental initiatives. The dependency on grant systems poses challenges for both government finances and individuals, calling for a shift towards economic development and labor absorption. When discussing state-owned entities (SOEs), Smith acknowledged some progress in areas like Eskom's debt relief and infrastructure investment. However, he emphasized the importance of balancing fiscal stability, addressing wage bills, and promoting economic development while avoiding overreliance on tax adjustments. From an equities perspective, Smith highlighted sectors poised to benefit from the budget proposals. While retailers and food producers may benefit from VAT adjustments, the finance sector and precious metal miners are expected to perform well due to lower interest rates and geopolitical dynamics. However, uncertainties surrounding geopolitical tensions and reductions in aid could challenge certain industries. In conclusion, Smith underscored the need for sustainable reforms beyond the current budget cycle. While the budget proposal addresses immediate concerns, long-term fiscal health requires holistic governance, efficient resource allocation, and a shift towards economic development initiatives. The stability of South Africa's financial markets will depend on the successful implementation of these reforms.