One thing South Africa can do to avoid financial collapse

While the National Treasury has done a good job in putting South Africa on a better track to avoid a financial crisis, setting a fiscal rule will ensure that the country stays on a good path.

South Africa came close to facing a fiscal crisis in years past due to unsustainable government spending and a consequential ballooning of state debt.

With government debt set to stabilise in the current financial year, the state must now focus on putting rules in place that will prevent a repeat of these mistakes.

Bank of America analyst Tatonga Rusike explained that while South Africa is at a fiscal turning point, there are no fiscal rules in place yet.

“With no new Eskom support, and the deficit at less than 4% of GDP, the primary surplus is likely to reach 1.8% of GDP and stabilise debt,” he explained. 

Finance Minister Enoch Godongwana has promised to stabilise state debt as a percentage of GDP for the past few financial years, though the deadline has continued to be pushed.

However, this is expected to change in the current financial year, as the government is set to report its third consecutive primary budget surplus in 2025/26.

This surplus – which excludes debt servicing costs – will allow the government to stabilise its debt at around 77.9% of GDP.

This is considered a critical fiscal turning point for South Africa – stabilising state debt will allow the government to start chipping away at its debt and, therefore, reduce debt service costs.

Interest spending currently consumes a large portion of state expenditure, estimated at around R1.2 billion a day, crowding out funding for other, more productive budget line items like education and infrastructure.

Therefore, reducing these costs will allow the government to spend more on these productive line items, allowing it to grow the economy and improve the lives of its citizens.

However, to anchor this turnaround and prevent South Africa from going down the wrong path again, Rusike suggested implementing a fiscal rule.

The graph below shows the ratio of South Africa’s debt-service costs to revenue over the past few years, along with projections for the coming years.

Fiscal rule

A fiscal rule, in this context, refers to a permanent, numerical constraint that is put in place on budgetary items like debt, deficits, or spending.

These rules are aimed at giving clear guidelines to support fiscal discipline, ensure long-term sustainability, and anchor expectations about government financial management.

South Africa’s government has considered implementing a fiscal rule, though consultations are still ongoing, with likely implementation in 2027.

Rusike explained that, following South Africa’s move to a 3% inflation target, a credible fiscal rule could lead to lower bond yields, improve creditworthiness and reduce the country’s risk premium.

He explained that the National Treasury has traditionally used a nominal expenditure ceiling as the unofficial fiscal rule, which did not yield much success in curbing the state’s rising debt-to-GDP levels. 

“Options for the fiscal rule include a headline deficit limit, a primary balance target or a debt to GDP ceiling,” he suggested, adding that a deficit limit could also work together with a debt ceiling.

“We believe the 2026 Medium-Term Budget Policy Statement could lead to a formal proposal, with likely adoption in Budget 2027.”

He explained that a “softer landing” could focus on enhanced Parliament monitoring of budget targets and implementation, which would offer more oversight and flexibility rather than a hard rule. 

“A credible fiscal rule could add to an improving sovereign risk premium, that is, lower bond yields,” he said. 

“Market participants believe fiscal rules help to enhance sustainable public finances. In our view, a credible fiscal rule should focus on headline fiscal deficit, such as 3%.” 

That way, he said, a 3% deficit limit also ensures a primary balance of at least 1.5% of GDP. 

“If the economy grows faster than baseline, it opens room for increased tax revenue collection and absorbs expenditure pressures,” he said. 

“A large primary surplus can support declining debt to GDP and improve sovereign creditworthiness.”

The International Monetary Fund has made a similar recommendation, saying that establishing a clear, well-designed fiscal rule can help encourage discipline, build trust in policies, and reduce borrowing costs.

However, Bloomberg reported that economists do not expect Godongwana to formally adopt a fiscal anchor in this week’s Budget, with the minister likely to opt for delaying the announcement to October 2026.