Daily Market Report 25 Apr

Daily Market Report – 25 Apr 2025

GNU Faces the Fiscal Reckoning as VAT Hike Scrapped

Fiscal Framework Fallout – Now What?

The GNU may have dodged a political crisis by scrapping the VAT hike, but it’s inherited a massive fiscal challenge: a R75bn hole in the budget.

Key Points:

  • SA’s tax base is too small to carry the weight of an expansive state.
  • Despite the rhetoric, there’s no commitment yet to meaningful austerity:
    • Wage hikes
    • SRD grant extension
    • NHI aspirations
    • Cabinet size
    • SOE reform

The pressure is now on Ramaphosa and Godongwana to:

  • Cut real spending across departments
  • Shrink the civil service
  • Streamline state spending priorities
  • Explore partial SOE privatisations

As the IMF warns, if reforms are not enacted, debt will rise to 88% of GDP by 2030, well above the sustainable threshold.

ZAR Insight – Cautious but Still Fundamentally Supported

Metric Value
Spot                                     18.8500
Range                                     18.7250 – 19.0300
Bias Neutral to slightly appreciative if GNU holds steady

Despite:

  • Strong bond inflows
  • Lower VIX and global risk-on tone
  • Reversal of the VAT hike

The ZAR slipped slightly, reflecting investor hesitation over:

  • GNU’s cohesion post-VAT U-turn
  • Uncertainty about how the budget hole gets filled

However:

  • ZAR ranks 2nd globally on ETM’s carry attractiveness index
  • SA’s terms of trade remain ZAR-supportive
  • Real yields are still juicy and attracting inflows

Global FX Themes – Dollar Treading Water, Euro Steady, Yen Edgy

  • USD Index hovering near 99.50
  • EUR/USD consolidating; dips towards 1.1300 are buying opportunities
  • GBP/USD stable around 1.3270; watch UK retail sales today
  • USD/JPY facing whipsaw risk due to weekend Trump volatility; bias remains to the downside

Fixed Income Focus – Bonds Face Crosswinds

Domestic bonds rallied on:

  • Soft CPI print
  • VAT reversal optimism
  • Prospects of SARB cuts

But gains may be capped unless:

  • A new credible fiscal framework emerges
  • Investors see actual spending cuts and not just political talking points

The R209/UST10yr spread still sits at an attractive ~675bp, drawing in real-money investors.

FRAs – Market Bets on Rate Cuts Deepen

FRA Tenor Cuts Priced In
2X5                25bp (May cut priced in)
3X6                32bp
6X9                -56bp
9X12                -63bp
12X15                -65bp

This is the most aggressive pricing we’ve seen, driven by:

  • Weak growth outlook
  • Cooling inflation
  • Rising ZAR resilience

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