Investors back Godongwana’s VAT reversal
South African government bonds extended gains on Thursday after the National Treasury scrapped plans for a tax increase that threatened to rupture the nation’s coalition government.
The yield on benchmark 10-year securities fell six basis points to 10.76%, the lowest on a closing basis in three weeks. That added to a 12-point decline on Wednesday after data showed inflation had slowed more than expected in March.
The increase in Value-Added Tax was pushed through by the African National Congress, the largest party in the coalition, over the objections of the business-friendly Democratic Alliance, the second largest party, which challenged it in court.
Fears that the dispute would lead to a breakup of the coalition, stalling much-needed economic reforms, had pushed government yields to nine-month highs earlier this month.
While the political outlook remains uncertain, passing the budget would be positive for bonds, said Adam Furlan, a portfolio manager at Ninety One.
“It also means no short-term inflation impact from a VAT increase, which is also better for the outlook for bonds.”
The annual inflation rate slowed to 2.7% last month from 3.2% in February, beating the median estimate of 15 economists in a Bloomberg survey. Traders are pricing in 49 basis points of interest-rate cuts by the South African Reserve Bank this year.
While investors have cautiously welcomed the VAT reversal, it leaves questions over how the resulting R75 billion budget gap will be filled, and what now happens to the so-called government of national unity. The rand reversed an early gain to trade 0.3% weaker against the dollar.
“It may help the survival of the government of national unity coalition but hurt the fiscal outlook at a time of heightened global uncertainty,” said Anne Frühauf, senior vice-president at Teneo Intelligence.
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