Budget preview: On a firmer footing

Summary projections of the fiscal position

The 2026 Budget Speech will provide a fiscal update expected to reflect incremental consolidation, supported by modest macro revisions and favourable financial conditions, but without a structural shift in the debt trajectory.

Macro assumptions: Real GDP is likely to be revised marginally higher over the MTEF period, while CPI and nominal GDP projections are adjusted slightly lower. The softer nominal path tempers revenue buoyancy despite improved real activity.

Fiscal aggregates: The main budget deficit and primary balance are expected to improve by approximately 0.2pp of GDP relative to the November 2025 MTBPS.

Revenue and policy measures: Commodity-related revenue gains largely offset the fiscal cost of baseline tax adjustments and smelter subsidies, leading to a smaller net increase.

• FY25/26: Revenue modestly above target (+R8bn) alongside expenditure underspending (~R5bn).
• FY26/27: A net tax increase of R8bn (+R35bn in taxes, partially offset by baseline tax increase of R20bn and R10bn smelter subsidy to Eskom). Expenditure projection is kept unchanged.

Primary balance and debt: The primary surplus improves in FY25/26 (0.9% to 1.1% of GDP) and remains broadly stable at 1.2% in FY2026/27. Gross debt-to-GDP is likely to be revised slightly lower, with ICIB projecting 76.4% (National Treasury 76.0%) of GDP. Improvements are driven more by lower debt-service costs, inflation, and a stronger rand than by materially stronger growth.

Financing strategy: The closing cash balance benefits from prefunding and a slightly improved deficit outcome. A lower borrowing requirement in FY26/27 creates scope to scale back Treasury bill and FRN issuance as indicated in the November 2025 MTBPS. Following the reduction in SAGB supply of R750m per week, we expect issuance parameters to remain broadly unchanged until the MTBPS, pending confirmation of the durability of commodity-driven revenue gains.

Credit rating outlook: Market focus remains on whether Moody’s could revise South Africa’s Ba2 (stable) rating outlook to positive, especially after S&P Global’s recent one-notch upgrade, which aligns its foreign currency rating with Moody’s and maintains a BB+ positive outlook on local currency debt. A key focus is boosting private sector fixed investment as structural reforms gain traction. Debt servicing costs remain elevated at more than 5% of GDP. Our baseline forecast is the rating will remain unchanged unless reforms are implemented more quickly.

‘Virtuous cycle’ of credible fiscal consolidation and higher financial

The February 2026 Budget Review will be presented in the context of a significantly improved domestic asset-pricing environment. Since the second half of 2025, SAGB yields have steadily decreased, reflecting both a narrowing in the sovereign risk premium and a positive shift in country-specific macroeconomic policies. A key factor supporting this rerating has been the reduction of fiscal “unknowns” that previously undermined credibility and caused repeated upward revisions inspending.

Notably:

• No additional equity injections or emergency support for major SOEs announced, reducing contingent liability risks.
• The public sector wage agreement has been settled for three years to FY27/28, lowering short-term expense volatility and enhancing forecast reliability. However, negotiations on public sector wages resume this year.

ICIB has used National Treasury’s sensitivity analysis of debt and interest rate costs to estimate the effect of rerating the financial asset prices on debt servicing costs and gross debt.

National Treasury’s analysis shows:

• A 1pp change in CPI inflation lowers gross loan debt by R11.1bn.
• A R1 change in the R/$ reduces gross debt by R31.6b.
• A 1ppt change in short- and long-term interest rates shaves R7.8bn and R12.3bn from debt service costs and gross loan debt.

Our baseline scenario suggests a modest improvement in fiscal metrics compared to the November 2025 MTBPS, particularly in the primary balance and short-term borrowing needs, but the changes are expected to be gradual. We forecast the gross debt-to-GDP ratio decreases from approximately 77.7% in FY26/27 to about 76.3% in FY28/29, compared to National Treasury’s projection of 77.4% to 77.0% over the same period. Debt servicing costs are expected to stay above 5.0% of GDP, requiring a primary surplus of 2.7% of GDP and a main budget deficit of 2.0% to ensure the debt follows a clear downward path or to lower real interest rates, which remain 3-4% higher than nominal GDP growth. The National Treasury’s MTBPS indicates a primary surplus of 2.5% is expected to be reached by FY28/29, aligning with ICIBs’ projection.

From a rates perspective, we see limited potential for a substantial rally in SAGBs. Additional policy easing by the MPC could lower yields by approximately 20 basis points. However, much of the duration rally seems to have already occurred in our view.

Fiscal anchor: National Treasury published a detailed discussion document on fiscal anchors in 2025 and held consultative workshops. The MTBPS stated a formal policy proposal will be finalised in 2026.

Gambling tax: The National Treasury released a discussion paper proposing a 20% national tax on gross gambling revenue from online gambling and interactive betting platforms. This would be in addition to existing provincial taxes, which currently range from 6% to 9% on licensed operators. The government describes the tax partly as a measure to reduce social harm linked to easy online betting access. It could generate over R10bn annually. No formal announcement is expected.

Infrastructure, PPP reforms and derisking infrastructure investment

There has been progress in electricity and logistics reforms. However, this has not yet significantly impacted economic growth activity and projections. It is viewed as a medium-term dynamic, as regulatory and legislative reforms are implemented. The Minister of Finance is expected to deliver a progress report on Operation Vulindlela’s reforms in the critical network industries, where a pipeline of projects is anticipated to use private-sector and capital through PPPs and PSPs, crucial for accelerating growth.

President Ramaphosa’s SONA address highlighted that business is now viewed more as a partner in driving growth, rather than ‘just’ providing capital, to a cash-strapped gov. The Budget is expected to provide more details on several key announcements already made, including:

• The original unbundling plan for Eskom will remain unchanged, with transmission assets transferred to an independent TSO, after the Minister of Electricity approved plans to keep the assets with Eskom. This could affect the ability to raise the R440bn in financing needed to expand the grid. It will continue to keep transmission assets independent of Eskom.
• Municipal performance with a focus on a utility model for trading services, and a new funding- and performance-linked support of R54bn over six years, for metros that implement specific reforms to boost service delivery for the water and electricity systems.
• SONA announced the formation of a National Water Crisis Committee to coordinate the government’s response to widespread water outages and infrastructure failures. Ramaphosa will chair this committee, raising water service delivery to a national strategic priority, similar to the crisis committee model used for load shedding. The government has allocated around R156bn over three years for water and sanitation infrastructure upgrades and system reforms.

Reforms: A National Water Resources Infrastructure Agency is currently being established. Operating license regulations for water service providers are under development, and standardised documentation is being finalised, to support performance-based contracts for reducing water losses at municipalities.

Financing of PPPS

Investec’s infrastructure team notes a major challenge in realising the infrastructure development plan has been the inability of National Treasury to provide sovereign guarantees, similar to what benefited the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). The MTBPS announced the need to attract private capital and promote alternative delivery mechanisms to speed up infrastructure development.

This includes (1) an infrastructure bond, of which R11.8bn was issued in December (see section on the financing strategy), and (2) a Credit Guarantee Vehicle (CGV) in partnership with the World Bank. The latter will guarantee large-scale infrastructure projects, reducing investment risk for all project stakeholders, including financiers.

The infrastructure team notes the CGV is intended to replace the traditional guarantee provided by the government and will significantly lower fiscal risk because issuing a traditional guarantee for infrastructure projects is a contingent liability that could become an enforceable liability if the project does not go as planned.

The CGV will operate as a private, special-purpose, non-life insurance entity with an AAA rating. Its shareholders will include the South African government through National Treasury, the World Bank, multilateral development banks (MDBs), and private investors.

While the market can source coverage from the private sector, it is costly, limited, and therefore does not mitigate key risks. The cost of coverage is passed to the procuring government as part of the service tariff, which diminishes the expected cost savings in a PPP structure. Despite the costs of the CGV, the shareholder structure will ensure the cost aligns with the broader value-for-money benefits expected in PPPs.

In addition to reducing reliance on sovereign guarantees, the CGV will improve access to financing. More importantly, financiers will have a backstop for a bankable instrument. Currently, the focus is on raising around R43bn (US$2.5bn) over the next five years, with National Treasury initially contributing up to R10bn (US$500m).

The CGV will be available for transport and water projects. Stakeholder engagement and testing of the principle are already advanced, and phase 1 of the Independent Transmission Programme (ITP) has been identified as the first infrastructure project to benefit from the CGV. An initial R2bn from National Treasury will be injected into the CGV to support expanding electricity transmission under ITP Phase 1, which is critical for energy security.

Beyond the initial rollout, the CGV will need to be scaled up significantly to fully guarantee the long pipeline of infrastructure projects, including the rail corridor private sector participation (PSP) projects, as these projects can only advance if a guarantee, like the CGV, is provided within the fiscal constraints of National Treasury.

Minor changes to macroeconomic projections expected

The South African economy is entering a cyclical upswing, driven by favourable external factors. Higher commodity prices and a weaker US dollar have strengthened the rand, reduced inflationary pressures, and created space for monetary easing.

Although the macroeconomic outlook is improving, we don’t anticipate a significant upward revision to National Treasury’s growth forecasts at this moment, as the full impacts of structural reforms are expected to become clearer from 2028 onward. Nevertheless, progress has been made, which will be discussed in the Minister of Finance’s report on infrastructure reforms.

Consumption growth is expected to slow to about 2.1% in 2026 (Treasury’s current forecast of 1.6% is likely to be revised upward), down from an estimated 3.0% in 2025 (Treasury: 2.6%). The slowdown reflects base effects from roughly R75bn withdrawn under the two-pot retirement system, which temporarily boosted spending and personal income tax receipts in 2025 but will not occur again in 2026. Nominal wage growth is also expected to slow next year as inflation declines, following a 3.9% increase during the first three quarters of 2025. However, lower inflation, forecast to average around 3.1% in 2026 in our baseline, should support growth in real disposable income, especially in the first half of the year.

On the nominal side, risks are weighted toward the downside. Treasury’s 2026 average inflation forecast of 3.7% remains above both ICIB’s and the SARB’s projections of c.3.3%. If inflation falls below Treasury’s assumption, nominal GDP growth could be revised down, affecting revenue estimates and debt dynamics.

How will Treasury allocate the revenue windfall?

A key question is how National Treasury will allocate the expected revenue surge from higher mining taxes. First, we believe Treasury will remain cautious in its estimates, likely ranging from R50-80bn. ICIB’s suggestions:

• The baseline revenue framework currently includes a further R20bn tax increase in FY26/27. This follows two consecutive years without bracket creep relief for personal income taxpayers, which has cumulatively generated c.R52bn in additional revenue through fiscal drag. The outcome has been a decline in household disposable income and an increase in the effective tax rate. We expect the projected R20bn could be fully or partially withdrawn by making some adjustments to tax brackets.
• On the expenditure side, Treasury is likely to bear part of the cost related to the Department of Trade, Industry and Competition’s announcement that electricity tariffs for chrome producers will be reduced by 35% for 12 months. We estimate the resulting revenue shortfall for Eskom at between R5.2-10bn. This would need to be offset through fiscal support or internal reprioritisation.
• Given these issues and the significant revenue windfall that National Treasury will include in its projections, will there be capacity to allocate some of the windfall toward fiscal consolidation? A reduction in gross bond issuance beyond that announced and projected in the MTBPS is possible but is not our primary scenario (see financing analysis below).

Net revenue receipts: SARS, precious metal prices and baseline tax assumption FY25/26 baseline forecast: ~ R8bn higher. With upside risk to the forecast.

December 2026 exchequer data have not signalled a material upside risk to the FY25/26 revenue projection. Gross tax receipts increased by 8.6% during the first nine months of FY25/26, ahead of the 8.1% target.

• Corporate income tax (CIT) has risen by 8.8% (T: 7.7%) YTD and by 14.1% YoY in December, with June and December high seasonal tax payments for several companies. Our analysis of the data suggests CIT and mining royalties may be ~R8.0bn more. Other sectors have also done better, with improved profits before tax and dividend payments, evident in the manufacturing (+22.9% YoY) and trade sectors (+27.6%YoY) for Q2 and Q3 25. Tax payments from the electricity sector have been added, as Eskom has turned profitable in FY24/25. While December CIT payments increased by 14.3%, it was softer than anticipated.
• SARS has a baseline forecast of R100bn, achievable with R70.7bn collected YTD. However, it aims to collect an additional R20-33bn through outstanding debt collection, which is falling short of the target. While an acceleration in Q1 26 is possible, it is not included in our baseline forecast. In November 2025, there was a revenue overrun of R19.5bn in gross tax collection, with R11.3bn attributed to VAT receipts, due to a combination of increased enforcement to prevent fraudulent VAT refund claims and weaker imports.
• The National Treasury has linked the removal of the R20bn tax increase assumption in FY26/27 to SARS’s ability to collect more taxes. Currently, it appears a partial offset could result from higher mining revenue receipts in FY26/27. These are likely to be revised upward, as National Treasury’s forecasts for gold and platinum in 2026 –averaging $3,830.60/oz and $1,494.20/oz have been surpassed, with prices at $5,000/oz and $2,035/oz. Prices have become more volatile since January, driven by profit-taking, mild US inflation data, ongoing US policy unpredictability, and geopolitical uncertainties.
• The lower inflation environment can impact PIT collections, which are linked to inflation. In this context, the salary increases to be negotiated for FY26/27 will be substantial. The National Treasury projected increases of 4.5% and 3.3% in its baseline forecast.

Baseline forecast FY26/27: Mining taxes paid by gold and platinum companies are estimated to be R50-100bn more. We have assumed R55bn, some R25bn more than our estimate for FY25/26. The net increase could be R8.0bn, depending on a partial or full adjustment to the baseline tax assumption of R20bn, and chrome subsidy payments to Eskom of R7.0bn.

Expenditure: Commitment to containment to be reiterated, with no major deviations

Baseline forecast:

• FY25/26: R5.0bn less
• FY26/27: Unchanged, although lower debt servicing costs allow space for a small reduction

Lower interest rates, approximately 100bps below prior assumptions, together with a smaller inflation-linked bond (ILB) revaluation effect could reduce debt-servicing costs by roughly R5bn. The key question is whether National Treasury will allow full savings to flow to improved fiscal metrics or partially reallocate them to areas where the expenditure pressures.

Apart from a potential further reduction in debt servicing costs, we do not expect a significant change to the non-interest spending assumptions outlined in the 2025 MTBPS. Spending increased by R15.8bn for FY25/26. This included raising the contingency reserve to R13.5bn, from R8.5bn, mainly to fund two freight rail rehabilitation projects under the Budget Facility for Infrastructure (BFI) and expenses related to the municipal elections.

Over the MTEF period, there has been meaningful moderation in projected debt-servicing costs, resulting in cumulative savings of R37.4bn. Growth in debt-service costs has been revised down to 3.8%, from 7.4% previously, reflecting lower borrowing costs and an improved inflation profile. In addition, inflation-related adjustments to non-interest expenditure have been reduced by R19.1bn, with growth revised to 3.6% (8.0% in FY25/26).

Although capital expenditure remains relatively low, at approximately 5.0% of total consolidated spending, or R127.8bn in FY25/26, it is the fastest-growing expenditure category over the MTEF. This suggests a gradual rebalancing toward investment-led spending, albeit from a low base.

Progress report on:

• The Target and Responsible Savings (TARS) initiative: R6.7bn of savings identified, with possible more announcements to follow.
• Removal of ghost workers, with 8,854 cases reported in the MTBPS.
• The Early Retirement Programme focuses on allowing older employees to leave the public service without penalties and replacing them with younger workers. The MTEF allocates R5.0bn here, which could save R3.5bn annually.
• The social relief of distress grant (SRD) will be redesigned by combining support for unemployment but attaching it to skills development, work opportunities, and productive activity.
• SETAS, funded by the 1% Skills Development Levy of payroll, generates R20-25bn annually but has not achieved its goals due to weak governance, irregular expenditure, and accumulated surpluses.

Main budget projections – continued but marginal improvement

F25/26 forecast: ICIB’s baseline forecast assumes no revisions to main budget expenditure forecast.

Once again, major revisions are not expected. A contingency reserve of R32bn has been allocated for a permanent Social

Relief of Distress (SRD) grant. The baseline forecast assumes a 4.5% wage increase, which is currently under negotiation.

Forecast: ICIB’s baseline projection is for revenue to fall short of target by R12bn, in line with February 2024 forecast in a high road scenario, or in a low case scenario, undershoot the target by ~R22bn.

Financing of the gross borrowing requirement

The main budget deficit is expected to improve by 0.2 pp to 4.3% of GDP in FY25/226 and from 3.6% to 3.5% of GDP in FY26/27. The primary budget surplus is projected to increase from the MTBPS estimate of 0.9% of GDP to 1.1%, while remaining unchanged at 1.7% of GDP. We note the risk to the forecast is slightly better, depending on commodity prices and tax collections.

FY25/26 financing strategy – Ending the year with a significantly higher cash balance

• Investec CIB’s calculations show National Treasury is ahead of its funding cash target by ~R33.0bn, contingent on the pace of funding in the final two months of the fiscal year. This despite the reduction in the weekly SAGB auctions to R750m, effective from mid-November 2025. Non-competitive bond auctions remained relatively healthy, with SAGB yields declining almost every month since April 2026, raising R68.4bn during the first ten months of the fiscal. This is similar to the running rate in FY24/25, where a total of R78.3bn was allocated.
• Diversification of funding strategy reduces pressure on the SAGB yield curve: A further diversification into funding instruments, such as an infrastructure bond of R11.8bn, was issued in December. The final two months will see R80bn in cash paid to Eskom, thereby reducing cash balances.
• Owing to a smaller main budget deficit and more cash raised, including R104.7bn on the international capital markets (F: R94.3bn), the drawdown in cash balances is likely to be materially smaller. National Treasury estimated a drawdown of R82.7bn, with ICIB expecting R19.0bn. This implies a materially higher closing cash balance, potentially topping R300bn.

FY26/27 financing strategy - permutations to ponder

The borrowing requirement declines from ~R568.3bn (ICIB R547.2bn) in FY26/27 to R377.7bn (ICIB R371.6bn) in FY26/27 in the MTBPS. The sharp decline can mostly be ascribed to the end of Eskom’s debt relief in FY25/26. In view of the diversification in the financing strategy to include FRNs and infrastructure bonds, National Treasury has flexibility in which instrument to tap more from, depending on its decision on SAGB supply.

With the intention of gradually lowering the financing costs by lowering the maturity of government bonds, there are several permutations of the financing strategy:

• Infrastructure bonds: With the introduction of these, the question is how many will be issued? In FY25/26, the BFI has approved nine projects with a total capital value of about R55.5bn, of which approximately R15.3bn is expected to be funded by the facility itself over the medium term. The National Treasury has reconfigured the BFI to operate multiple application windows per year instead of a single window. The BFI operates at the project level, implying more projects will be processed and potentially funded through it, increasing its activity and fiscal footprint over time. It is one of the fiscal mechanisms to finance infrastructure investments of more than R1tn over the next three years. The February 2026 Budget Review is expected to show a separate line for the quantum of issuance.
• FRNs: In FY25/26, FRN auctions were ramped up, raising more than R90bn. This amount is likely to be more than halved in FY26/27.
• SAGB issuance: The reduction of R750m in weekly bond auctions decreases the total nominal issuance by R23bn, bringing it to R144.0bn in FY26/27 from R170.0bn. Two issues to consider are (1) the assumption on non- competitive bond auctions and (2) the success of R187 switches. We have estimated R30bn for non-competitive auctions. Gross SAGB issuance declines to approximately R176bn from about R240bn, although cash raised will benefit from lower discounts and the issuance of premium bonds.
• ILB auctions: There have been several ILB auctions where the R1.0bn offered has not been fully allocated.

ICIB baseline forecast: It remains uncertain how well the R187 monthly switch auction, with R95.0bn maturing in December 2026, will be supported. We believe National Treasury could maintain SAGB bond auction levels, possibly reducing ILB auction sizes and reassess at the MTBPS.