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Why didn't Gordhan's speech impress the markets?

Economist Rian le Roux says the tax increases weren’t as high as the markets expected.

Finance Minister Pravin Gordhan. Picture: GCIS.

JOHANNESBURG - Finance Minister Pravin Gordhan's Budget speech was widely welcomed and many expected it to impress the markets.

But it didn't, slipping sharply after Gordhan cut his 2016 growth forecast.

The local currency was trading at R15,33 to the dollar before he started his speech but at 5.30pm, the rand was at R15.70 to the US dollar, the highest level for the day.

LISTEN: Market not crediting Gordhan for spending cuts.

Rian le Roux, Chief Economist at Old Mutual Investment Group, says the tax increases weren't as high as the markets expected.

"It wasn't as good as we thought because, if you look at pre-budgets, analysts thought an increase in the top marginal rate for people earning above R1 million per annum would happen but it didn't."

Le Roux noted that capital gains tax was also increased less than expected.

"The fuel levy was expected to be 50 cents a litre but only increased 30 cents a litre. The disappointment was that we didn't get all the tax increases we thought we would get."

The economist added that there is some concern that the economy react more negatively than Gordhan projected.

"The minister is looking at 1,7 percent GDP growth for 2017, but the markets' consensus sits at one percent. There is a danger that if the economy doesn't reach 1,7 percent, his projections may be too optimistic."

Asked if Gordhan missed an opportunity, le Roux agreed that in terms of market expectations he did.

"The market was surprised by the form in which the fiscal consolidation came and is concerned by the economy next year, but what the market isn't giving him credit for is that he managed to cut spending."

Le Roux conceded that government is starting to get more control over its spending, which hasn't been good in recent years.

Gordhan delivered a budget that would cut government spending by R25 billion over the next three years, mainly by targeting its massive wage bill through freezing non-essential posts.


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