(Updates with closing prices)
JOHANNESBURG, Feb 21 (Reuters) - South Africa's rand, bonds and stocks all rallied on Wednesday after Finance Minister Malusi Gigaba unveiled the first value-added tax (VAT) hike in over two decades, part of efforts to cut the deficit and debt under new President Cyril Ramaphosa.
Bonds led the charge, with the yield on the benchmark instrument due in 2026 falling 11.5 basis points to 7.985 percent, reflecting relief that swelling debt levels are being tackled.
The budget deficit is expected to narrow to 3.5 percent of gross domestic product by 2020 from 4.3 percent in the 2017/18 fiscal year, while gross debt is seen narrowing to 56 percent of GDP in the 2020/21 fiscal year from nearly 60 percent seen in the October mid-term budget statement. "This modest improvement in the deficit outlook enabled the minister to announce a lower amount of government bond funding and by extension a lower amount of debt servicing costs over the next three years," said Craig Pheiffer, chief investment strategist at Absa Stockbrokers & Portfolio Management.
The rand extended earlier gains and at 1555 GMT was 0.79 percent firmer at 11.6350 to the dollar, within striking distance of three-year highs below 11.60 it scaled last week after Jacob Zuma resigned as president.
Stocks rose, though retailers faltered before paring losses as the VAT hike will hit consumption. The retailers index closed 0.22 percent lower. Clothing retailer the Foschini Group fell over 1 percent.
The benchmark Top-40 index rose 1.39 percent to 51,727.37 while the wider All-share index added 1.17 percent to 58,605.97.
(Reporting by Ed Stoddard; Editing by Alison Williams)
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