By Tannur Anders
JOHANNESBURG (Reuters) -The South African rand was stable on Thursday after the finance ministry said it was withdrawing a contentious increase in value-added tax (VAT) that was due to take effect next month and as investors awaited clarity on the budget plans.
The country’s biggest parties have clashed over the budget’s proposal to raise VAT by 0.5 percentage points on May 1 and another 0.5 points next year, which threatened the stability of the coalition government and roiled South African markets over recent weeks.
At 1303 GMT, the rand traded at 18.68 against the dollar, near its closing level of 18.6875 on Wednesday.
Danny Greeff, co-head of Africa at ETM Analytics, said that he believed the scrapping of the VAT hike was yet to be fully priced into the market.
“With a long weekend approaching, we expect the USD-ZAR to trade in a range-bound manner today and tomorrow, absent any major new developments,” Greeff added.
The VAT hike has caused political wrangling for weeks, exposing deep rifts between coalition government heavyweights, the African National Congress (ANC) and the Democratic Alliance (DA).
The DA, which is the second-biggest party in the Government of National Unity (GNU) stoked fears that it could leave the coalition after challenging the tax increase in court and voting against the fiscal framework in parliament.
“While the move (to withdraw the VAT hike) suggests the GNU is likely to remain intact, providing a measure of stability, uncertainty persists,” said Zain Vawda, market analyst at MarketPulse by OANDA.
Vawda said the currency remains under pressure until the government outlines plans for alternative funding or potential budget cuts, leaving room for potential setbacks in the rand’s recent gains.
The rand hit an all-time low this month on the VAT dispute and risk aversion over U.S. President Donald Trump’s tariffs.
It has since staged a recovery, but is still down about 2% since the start of the month.
On the Johannesburg Stock Exchange, the blue-chip Top-40 index last traded about 0.7% higher.
The benchmark 2030 government bond was stronger, as the yield fell 15 basis points to 8.89%.
(Additional reporting by Sfundo Parakozov, Alexander Winning and Bhargav Acharya; Editing by Kate Mayberry, Sharon Singleton and David Evans)
