Budget Preview 2025: Budget expected to be near MTBPS projections

The fiscal slippage has become a general trend in South Africa, as in most cases the fiscal metrics deteriorate, with only very occasional cases of improved outlooks, as occurred when savings in the GFECRA account were earmarked last year.

The latest gross debt to GDP ratio (October’s MTBPS) was projected to peak at 75.5% of GDP in 2025/26, well above the debt ratio of 60% of GDP instead seen as the maximum sustainable debt ratio for an emerging market economy.

However, the risk is for some widening of the debt ratios. State expenditure for the fiscal year to date is lower as a % of the estimated budget outcome this fiscal year compared to last, at 72.7% vs. 74.2%, for the first three quarters of the fiscal year.

For the government finance figures for the year to date, only main budget figures are available, i.e., figures of national government, while consolidated figures include the provinces and local municipalities, but are not available.  

The revenue outcome to date is similar to last year at this point, of 71.2% versus 71.6%, and both years see a budget deficit of -R258bn to date. However, a lowering of nominal GDP would increase the gross loan debt and deficit /GDP projections.  

On the inflation front, the MTBPS forecast of 4.6% y/y for 2024 is above the 4.4% y/y outcome, and the lower inflation rate means the nominal GDP measure could be adjusted down somewhat, further lifting the fiscal ratios, risking some slippage.

The budget deficit was revised weaker, to -5.0% of GDP for this year (2024/25) from -4.5% of GDP, and further evidence of fiscal slippage for 2024/25 is likely, to beyond -5.0%, and to around -4.5% -for 2025/26 and nearer to -4.0% for the next two years.

Similarly for 2025, CPI inflation is likely to be closer to 3.5% y/y than the 4.4% y/y in October’s Budget deficit, although the MTBPS’s growth forecast is nearer ours, at 1.7% y/y vs. 1.8% y/y. Much will depend on the state’s GDP and CPI projections.

SONA: what to expect

This week sees the State of the Nation Address (SONA) by the President, on 6th February (Thursday evening). The SONA tends to touch on the same themes each year, comparing progress against the prior year.

Investors will focus on the various crisis gripping the country such as weak growth, freight constraints, poor governance at a number of state entities, particularly municipalities and the need to fight crime and corruption.

The water and sanitation crisis, still high unemployment (poverty and weak growth) and GBV will also be in focus, while SA has seen greatly improved electricity supply stability which will be noted in particular.

A quicker turnaround on the water crises and at Transnet, particularly better enabling PPPs is a key theme investors are focused on, along with a sharp reduction in red tape, reduction in the regulatory burden.

The Sona’s typical blandness supports unchanged medium-term Budget direction, but greater fiscal consolidation is needed to return SA to investment grade and inspire business and investor confidence. 

Inflation expectations

Turning to inflation targeting, in the MTBPS, National Treasury stated more work needs to be done in this regard, and some update is expected in the Budget later this month. 

While National Treasury sets the inflation target, and the Reserve Bank is tasked with achieving the target, the Reserve Bank has stated it believes there is a need to lower the inflation target. 

National Treasury has worried about negative effects that could ensue on the economy and households, while the SARB has already published research on the positive implications from lowering the target.

Overall, for the Budget, state finances are not strong, and this weakness, combined with better-than-expected inflation but lower than expected GDP outcomes, means further fiscal slippage remains a risk.