The Open Market committee (FOMC) meeting took center stage last week, as it maintained its monetary stance by leaving the Fed funds target range at 5.25%-5.50% at its November meeting. Domestically, the MTBS has cast a worrisome tone for SA’s outlook as it highlighted a shortfall in projected government revenues.
International Market Developments
In a unanimous decision, the Federal Open Market Committee (FOMC) opted to keep the federal funds target rate within the range of 5.25% – 5.50%, a move that had been widely anticipated. The FOMC stressed the importance of proceeding cautiously in its monetary policy approach. The committee’s inclination remains toward tightening monetary policy, as they continue to evaluate the degree of additional policy tightening needed over time.
During a press conference, Chair Jerome Powell explicitly stated that the FOMC lacked confidence in its current stance achieving the 2% inflation objective. Powell clarified that the central question before the committee was whether they should raise interest rates further, rather than whether to consider a policy easing. However, he also emphasised that any deliberation about further rate hikes would be approached with care. The financial markets reacted positively to this news, with both equity and bond markets experiencing a rally. This response reflects the markets’ approval of the FOMC’s decision and its transparent communication.
Non-farm payrolls increased 150,000 last month, less than expected, following a downward revised 297,000 advance in September, a Bureau of Labor Statistics report showed Friday. October’s non-farm payroll data was the first data point in November to corroborate the view that the Fed’s rate-hiking cycle has ended.
Local Market Developments
The 2023 Medium Term Budget Policy Statement (MTBPS), presented recently, indicates a less favorable financial outlook for South Africa. The projected main budget revenue for 2023/24 is R44.4 billion lower than the estimate from the February budget, revealing a shortfall in expected government income.
Due to these weaker revenue projections, the National Treasury (NT) expects a main budget deficit of 4.7% of GDP, which is worse than the original 3.9% target set in February. This suggests that government spending will exceed revenue. To counter the revenue gap, Treasury has suggested tax measures to raise an additional R15 billion in the 2023/24 fiscal year and plans to reduce expenditures by R37.3 billion in 2024/25 and R47.7 billion in 2025/26.
Despite these efforts, the budget deficit is still expected to be greater than initially projected in February. As a result of the wider budget deficits and increased government spending, gross public debt is projected to peak at 77.7% of GDP in 2025/26, surpassing the previous projection of 73.6%. This indicates a rise in the country’s debt relative to its GDP. Even though the National Treasury increased its 2023/24 domestic loan funding estimates at the MTBPS, the weekly pace of nominal (R3.9bn) and linker (R1.0bn) auctions were left unchanged.