12 Nov 2025

Rand strength as inflation target range lowered

Annabel Bishop | Investec Chief Economist

The Reserve Bank’s move to lower the inflation target to 2–4% has boosted the rand and improved South Africa’s fiscal outlook, adding a note of optimism to the 2025 Budget.

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The 2025 Medium–Term Budget Policy Statement (MTBPS) saw debt ratios slightly higher, similar ratios for the fiscal deficit and an upwards revision to revenue projections for two years vs. May, and a lowering of the inflation target.

Revised gross revenue projections now show 2025/26 at R2.005trillion, from the previous estimate of R1.986trillion, and a near R20bn (R19.7bn) over-run as expected, due to higher VAT, corporate and dividend tax receipts.

However, additional expenditure of R15.8bn is now proposed, which includes R4bn to bolster SARS collections, R2bn to rebuild Parliament buildings, R5.2bn rollovers from 2024/25 and R1 billion to the IEC for the 2026 municipal elections.

In addition, there is additional spending for the Madlanga Commission of Inquiry of R1.6bn, the National Dialogue, Statistics SA, disaster relief, the Office of the Chief Justice, infrastructure costs and carry through costs.

Consequently, the budget deficit only narrowed to -4.7% of GDP for this year (2025/26), versus -4.8% projected in May’s Budget, and the -4.5% of the Bloomberg consensus (all as a % of GDP).

The fiscal deficit projection remained at -3.8% of GDP for 2026/27 with an estimated revenue overrun of R1.4bn (Bloomberg consensus -3.9%), and -3.3% of GDP for 2027/28 (-3.3% May) but a -R17.1bn revenue underrun is projected.

Debt ratios remain concerning

Projected debt ratios deteriorated, the gross debt ratio for 2025/26 is 77.9% of GDP (May projected at 77.4% of GDP), 2026/27 77.7% of GDP (May 77.2% of GDP), 2027/28 77.4% (May 76.7% of GDP) 2028/29 77.0% (75.9% of GDP).

While the budget may appear more credit negative on the deterioration in projected debt ratios, projected debt levels are lower. The MTBPs is unlikely to see any credit rating or outlook downgrades. Instead, the budget is positive.

Growth is forecast at 1.2% y/y this year, down from 1.4% y/y in May. The lowering of the inflation target to 3.0% y/y sees a 1% tolerance band around this, at 2%-4% y/y as expected for the target range, strengthening the rand towards R17.00/USD.

GDP growth has also been lowered in the MTBPS for next year, to 1.5% y/y from 1.6% y/y, remains unchanged at 1.8% y/y in 2027, and is projected at 2.0% y/y for 2028, with these figures not out of line with Investec’s forecasts.

Debt service costs are estimated to be lower this year, by R4.8bn, and the primary surplus grows to 2.5% of GDP by 2028/29, supporting a further projected decline in debt servicing costs. Savings over the MTEF are estimated at R6.7bn.

Gross debt is now projected at R6.070trillion for 2025/26 (the current fiscal year), down from the R6.090trillion projected at the May budget, with the lift in the ratio from 77.4% of GDP to now 77.9% of GDP due to lower nominal GDP.

For 2026/27, gross loan debt is projected at R6.349trillion, also down on the May budget figure of R6.447trillion, and for 2027/28 at R6.677trillion versus May’s projection of R6.820trillion, as inflation has been modest.

Lower inflation brings relief, but slower nominal growth keeps debt ratios high

CPI inflation is now expected at 3.5% y/y for 2025/26, down from May’s projection of 4.1% y/y, at 3.6% y/y for 2026/27 versus May’s 4.1%, and 3.3% y/y in 2027/28 (May 4.4% y/y), pulling nominal GDP growth below 6.0% y/y.

With nominal GDP growth now projected to run at 5.3% y/y for 2025/26, 4.9% y/y for 2026/27 and 5.5% y/y for 2027/28, instead of 6.3% y/y, 6.1% y/y and 6.5% y/y, the shrinking of the denominator has increased the debt ratios as a % of GDP.

Growing debt ratios reduce the sustainability of government finances, with the credit rating agencies focused on the country’s credit worthiness (ability to repay debt), but in itself in 2025’s MTBPs does not herald a credit rating change.

That is, debt levels are not rising, but rather less nominal GDP growth is expected over the medium-term, and less occurred in 2024/25, which is partly a function of lower inflation than expected. Faster growth than projected is also possible.

However, gross debt is projected to remain above 60% of GDP (the maximum sustainable debt ratio for an emerging market economy) out to 2033/34, at 67.9%, which is worrying, and fiscal consolidation is slow for South Arica.