South Africa is turning the corner

South Africa is heading into its latest budget with a rare sense of optimism, and the chance to mark a turning point for the nation’s long-strained public finances.

After years of rising debt and missed targets, stronger-than-expected revenue collections and restrained government spending have given the National Treasury room to breathe.

A surge in mining profits, driven by buoyant commodity prices, has boosted revenue, while delays in approving the budget earlier this year — caused by wrangling over tax hikes within the new coalition government — inadvertently curbed expenditure.

There’s no expectation of a similar fight when Finance Minister Enoch Godongwana delivers his medium-term budget update at 14:00 in Cape Town, with revenue in decent shape and tax changes not typically part of the Treasury’s mid-cycle review.

Investors have already taken the hint, lifting the FTSE/JSE Africa All Shares Index 46% in dollar terms so far this year and driving government bond yields sharply lower.

The rand, which has appreciated almost 10% against the greenback since the end of 2024, traded steady at 17.1452 per dollar by 8:31 a.m. in Johannesburg.

Portfolio managers are also weighing the prospect of a credit-rating upgrade and an endorsement from the finance minister of the central bank’s preference to aim for 3% inflation, in addition to the brighter budget outlook.

Economists surveyed by Bloomberg expect tax collections to exceed the Treasury’s May forecast of R1.985 trillion by R20 billion in the year through March 2026.

That’s likely to lower the consolidated budget deficit to 4.5% of gross domestic product, better than the Treasury’s 4.8% projection.

Such an outcome would also offer a filip to South Africa amid tensions with the US over tariffs and President Donald Trump’s false claims that White farmers are facing a genocide. 

“This is a turning point. This really is a significant inflection point,” said Andrew Matheny, economist at Goldman Sachs Group Inc. He sees revenue outperforming by as much as 55 billion rand, or 0.7% of GDP, which could “take the deficit quite a bit narrower.”

When Godongwana delivers the budget update to lawmakers, investors will be watching for signs that the extra revenue is being used to cement fiscal consolidation.

The improvements in South Africa’s public finances and overall debt metrics “will be very much key to investor sentiment across the board,” Casey Sprake, economist at Anchor Capital said.

“It’s very much the one measure that’s sort of hampering a renewed positive focus on South Africa.”

With improved value-added tax receipts and more solid personal and corporate income tax collections, “the near-term fiscal picture appears comparatively healthy,” she said.

The stronger position gives Godongwana scope to channel funds toward infrastructure and reform priorities, critical to lifting South Africa’s growth rate out of inertia.

He will also be watched for any help to embattled state-owned ports and rail firm Transnet, which is seeking additional financial support.

“It’s part of the infrastructure story, and there may be additional money going towards it,” said Frank Blackmore, lead economist at KPMG in South Africa. “But there will be more emphasis on private sector coming in with their money.” 

The mid-term budget will also be scrutinized for the politics around the spending choices by the governing coalition.

The so-called government of national unity — formed by the African National Congress with nine other parties after it lost its outright majority in elections last year — needs to demonstrate policy credibility to sustain a rally in government bonds and lure back fixed investment that has been fading.

Inflation target

The rally since the GNU was formed has reduced yields on the government’s 10-year benchmark by 255 basis points. And while some of that gain reflects broader demand for emerging-market assets, South Africa’s performance has stood out, with the central bank’s loud advocacy for aiming inflation at a lower target also boosting sentiment.

Economists expect the finance minister to endorse the 3% inflation goal, formalizing a shift announced by the central bank in July.

It would be the first adjustment to the framework since the current 3% to 6% target range was introduced in 2000 and a step toward entrenching lower price pressures and borrowing costs.

Markets are also betting that a narrower deficit will allow the Treasury to scale back domestic bond issuance, relieving pressure on yields.

Bank of America reckons the Treasury has room to reduce fixed rate issuance by as much as 250 million rand per auction.

Investors will be watching the debt strategy closely, Matheny said. “They might want to proceed cautiously” to see if the fiscal improvements are sustained, he said.

Ratings upgrade

South Africa’s removal from the Financial Action Task Force’s gray list last month, improved fiscal metrics and political stability within the coalition government have lifted hopes for a credit rating upgrade when S&P Global Ratings releases its review on Friday. Four of eight economists in a Bloomberg survey predict an upgrade.

Still, economists caution that one strong year doesn’t guarantee a fiscal turnaround. Sustained primary surpluses — where revenue exceeds non-interest spending — are needed to make a meaningful dent in debt levels, which are projected to peak this fiscal year at 77.4% of GDP by the Treasury.

“It’s not a foregone conclusion that what we’ve seen so far will translate into improved credit ratings,” said Jee-A van der Linde, senior economist at Oxford Economics. “But on the balance of risk it is more optimistic.”