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Importers should hedge before mini budget

If you are an importer, consider hedging your exposure before the mini budget on Wednesday, according to Bianca Botes of corporate treasury management at Peregrine Treasury Solutions.

It will be the first official budget speech of Minister of Finance Malusi Gigaba and will attract a high level of interest, in her view.

According to Botes, the rand is widely expected to be under pressure leading up to the mini budget and there will likely be "severe volatility" during the mini budget speech. She said there has already seen evidence of this in the week leading up to the mini budget.

By 13:16 on Monday the rand was trading at R13.70/$.

"The aim of a hedge is not to achieve the best possible rate, but rather to protect you against the imminent risks in the market. These risks arise in addition to the event risk of the budget speech and include inflation pressure in South Africa and the inability of government to curb excessive fiscal 'leakage'," explained Botes.

"The mini budget will serve to underline the shortcomings of the current government policies. There are many different ways to manage the risk and to hedge it."

Botes said Gigaba finds himself in a tough environment of low growth, meaning low revenue expectations, coupled with a higher expenditure requirement. Treasury’s spending is already ahead of target, while tax receipts are R40bn below expectations, leading to a projected budget deficit of 3.4%.

"This imbalance can only be reconciled through raising taxes or increasing borrowings. However, SA finds itself in a landscape where a rise in global interest rates is widely expected. Coupled with severe inflation pressure and a small tax base, it will become increasingly hard for SA to obtain debt," said Botes.

"One also needs to consider the strain of the debt repayments. One cannot but wonder how the R2bn South African Airways (SAA) bailout could have contributed in supplementing the fiscal coffers."