Budget Preview - Vasbyt: staying the course

• Real and nominal GDP and CPI projections to be marginally downgraded, respectively, from 1.4% and 3.7% (ICIB 1.2%. 4.3% and 3.4%) in 2025, with a cyclical acceleration and higher CPI inflation forecasts likely to remain unchanged.
• Tax revenue estimates are expected to be revised upward by approximately R45bn in FY25/26, with the improvement extending across the Medium-Term Expenditure Framework (MTEF) period. This stronger revenue trajectory removes the need for additional tax increases in the baseline forecast over the next two fiscal years.
• The main budget deficit is now projected to narrow to 4.0% of GDP (previously 4.6%) or R311.0bn (previously R361.3bn) in FY25/26, declining further to 3.0% of GDP by FY27/28. The primary surplus is expected to rise to 1.2% of GDP (from 0.8% previously), reflecting improved fiscal discipline and revenue gains.
• The gross debt-to-GDP ratio is projected to edge higher – from 77.4% to approximately 78.3% – owing to slower nominal GDP growth, and switch auction activity and prefunding. Contingent liabilities will rise following an increase in Transnet’s guarantee facility by R95bn, bringing total government guarantees to R534bn (8.8% of GDP).
• Improved revenue outcomes and lower financing costs will help reduce debt service costs as a share of revenue from 21.5% to 20.4% over the MTEF period.
• The financing strategy is expected to remain broadly unchanged. A larger closing cash balance will likely be allocated toward the first leg of the R186 bond redemption (R010 of R99bn).
• A potentially bigger drawdown of GFECRA over and above the R25bn in the baseline forecast could occur, supported by the increase in the gold price. The Tuesday nominal bond auction sizes are expected to remain stable, with potential reductions announced in February 2026, and a reduction in 75% allocation at non-competitive bond auctions on Thursdays. Switch auctions of the R187 (December 2026) will continue in FY26/27 but National Treasury is likely to maintain higher cash balances in anticipation of large redemptions in FY27/28, amounting to nearly R260bn.

The November 2025 MTBPS will provide an update to the May Budget Review, which maintained a strong emphasis on fiscal consolidation while shifting toward a more growth-oriented policy stance and resistance to a VAT increase to finance higher spending.

The year has been extraordinary, marked by significant volatility in global growth expectations and sharp market fluctuations. The period following the implementation of post-Liberation Day tariffs saw an initial deterioration in sentiment, though markets have since shown increasing resilience, discounting much of the noise around trade tensions and potential politicisation of the US Fed. For South Africa, economic conditions have softened, with 2025 GDP growth expectations revised down from nearly 2% (mid-2024 estimate) to 1.2%. However, tax revenue performance has outperformed expectations, supported by stronger commodity prices, particularly in precious metals, which will bolster mining tax receipts. The macroeconomic policy framework has been strengthened by the SARB’s preference for inflation near the lower end of the 3-6% target band which has contributed to lower government bond yields and reduced debt-service costs.

GNU, fiscal consolidation and budget process: The budget process itself has evolved significantly in 2025, following three attempts to table the annual budget earlier in the year. The February 2025 Budget prompted an adjustment to the process to accommodate the dynamics of a coalition government, requiring a longer lead time to share fiscal assumptions with Parliamentary committees before final Cabinet approval. This culminated in three sequential budgets between February and May 2025, each refining the fiscal stance and medium-term projections. The key takeaway from the May 2025 Budget Review was the firm commitment to fiscal consolidation and debt stabilisation. Any upward revisions to expenditure are to be offset by additional revenue measures, ensuring that the main budget deficit remains contained.

The November MTBPS is therefore expected to reinforce policy continuity, extending the existing MTEF projections through to FY28/29, with a continued focus on balancing growth support with fiscal prudence.

1. Macro economic policy announcements

• Fiscal anchor: While the likelihood of an announcement of a firm statement of intent about the fiscal anchor is unclear, the Minister of Finance is expected to provide an update. The intent of a fiscal anchor will also be to enhance a culture of fiscal responsibility that must be embedded in institutional and legal frameworks rather than enforced through rigid numerical constraints, which can be broken – as evidenced in the EU and Argentina – and which reduces the credibility of the fiscal anchor. There is also a need to link to the quality and efficiency of spending which is where the TARS programme is coming in.
• Inflation target: The Minister of Finance is expected to make an announcement about a lower inflation target at either the MTBPS or February 2026 Budget Review. The joint statement on 1 September indicated that Minister of Finance and SARB Governor will agree on any changes to the target band. Technical work regarding the effect of a lower inflation target on the fiscal framework, has been concluded. A possible outstanding issue is public consultations on a lower inflation target. An issue of interest is that the revenue overrun could provide a small offset by cancelling tax hikes pencilled in for FY26/27.

2. Structural economic reform update

In addition to South Africa’s removal from FATF’s grey list after 35 months, Operation Vulindlela released its quarterly update of economic reforms for Q2 25 (July to September). Slow and steady progress has been made, but we are of the view that the long-lead times imply that we are only likely to see an acceleration in growth from 2027.

• Electricity and transmission sector: The pipeline of private investment in new generation capacity from renewable energy sources continues to grow. Construction of the ~R400bn projects is gathering momentum. Following the release of the IRP 2025, ICIB noted that energy security in South Africa by 2030 will be shaped by the following factors: (1) improving the performance of the existing coal power fleet, (2) decommissioning of old coal power stations, (3) increasing base load energy through increasing the prominence of gas-fired new power generation capacity in the energy mix, and (4) new transmission lines of 14 000km to be constructed to connect renewable energy to the grid. OV2’s progress dashboard shows that the National Transmission Company of SA (NTCSA) has submitted its application for a market operator license to Nersa, the draft Market Code has been finalised, and Grid Capacity Allocation Rules and Electricity Trading Rules are expected to be finalised by the end of 2025 and January 2026.
• Logistics sector: Open access to the freight rail network has been provided with the allocation of capacity to 11 private train operating companies across 41 routes. This is estimated to increase freight by 20m/t p.a. A revised Network Statement is expected by end of January 2026. RFPs for rail and port corridor PPPs are underway and expected to be launched by March 2026.
• Water sector: Regulatory and legislative work is happening to establish the National Water Resources Agency, and the Water Services Amendment Bill has been introduced in Parliament to reform water service delivery.
• Visa reforms: The Electronic Travel Authorisation (ETA) system has been developed, enabling more remote application and issuance of visas.
• Local government: The Metro Trading Service Reform Programme has been implemented. The White Paper will be published in April 2026.

Madlanga Commission on interference in police and judicial processes: The Commission has revealed the shambles of top leadership in the police, and the fight over access and control of resources. Political interference in policing and the criminal law system undermines the judicial process, requiring dramatic interventions and changes to deal with organised crime.

3. Fiscal consolidation

In the context of the GNU’s commitment to fiscal consolidation, the gross debt-to-GDP ratio will be an important indicator, necessary to enhance National Treasury’s credibility. The main budget deficit and primary budget surplus are expected to show an improvement due to an upward revision to gross tax revenues, offsetting a moderation in the nominal GDP growth rate. Government’s contingent liabilities are expected to rise by nearly R100bn (0.8% of GDP), owing to the increase in Transnet’s guarantee in June 2025. The decline and flattening of the SAGB yield curve that has occurred since late May 2025 can primarily be ascribed to the SARB’s preference to target the lower end of the inflation target range of 3.0%, that has seen a decline in the expected inflation risk premium embedded in SAGB yields, non-resident ownership of government bonds that has risen to 26.8% September due to JPM Morgan’s reweighting of its GBI-EM index and the carry trade as US rates decline, and most recently, the anticipated reweighting of the ALBI that could increase the modified duration by 0.4 years in November, which has prompted demand for longer-dated bonds in October. Stabilising debt-servicing costs, however, remains challenging in view of the gap that exists between nominal GDP and SAGB yields, although the revaluation of ILBs decline on lower inflation.

The cyclical upswing in the economy is expected to strengthen in 2027, with GDP growth of 1.7%. A commitment to spending reforms, increasing the quality and efficiency of spending and a more growth-orientated budget with slightly higher allocation to capital investment, are important developments.

4. Tax revenues and composition of GDP growth in 2025

Heading into the May Budget Review, Bloomberg consensus GDP growth forecasts for 2025 were trimmed to 1.0%, but National Treasury held its projection steady at 1.4%. More recently, growth has been revised up slightly to 1.2% after a stronger-than-expected Q2 performance. However, the composition of growth has shifted – a change that matters for the revenue outlook. In May, Treasury based its 1.4% forecast on household consumption growth of 1.8%, fixed investment of 3.2%, and imports of 2.8%. ICIB’s latest view projects growth at 1.2%, but with a different mix: consumption is expected to accelerate to 2.3%, supported by two-pot withdrawals, higher real disposable income, and stronger wage gains. In contrast, fixed investment is expected to contract by 2.0%, while import growth moderates to just 0.6% YoY. Looking ahead to 2026, ICIB projects GDP growth of 1.7%, underpinned by consumption of 1.9%, a recovery in fixed investment to 3.6%, and import growth of 2.6%.

Revenue receipts for FY25/26 are set to outperform, despite a mixed economic backdrop and lower real and nominal GDP forecasts. National Treasury remains the most optimistic at 1.4%, versus ICIB and the SARB at 1.2%, and both the IMF and Bloomberg consensus at 1.1%. The fiscal picture is encouraging: gross tax receipts rose by a strong 9.3% YoY in the first half of the fiscal year, comfortably exceeding the 7.0% YoY target.

• Personal income tax (PIT): running in line with target, with two-pot withdrawals rising by a further R18bn from April to September 2025, from R57bn from September 2024 to March 2025. This has raised an additional R6.0bn in tax revenues, on top of the R12bn collected in FY24/25 and is ahead of target. Another round of fiscal drag is keeping the base effect intact. Whereas PAYE is ahead of target at 9.1% (Budget: 8.6%), PIT refunds have also risen by 16.2% (Target: 16.2%) and have reached 70% of the budget (67% in FY24/25).
• Net VAT receipts: Domestic VAT is well ahead of target, bolstered by an acceleration in consumption spending on vehicles and other consumer goods. Imported VAT, however, is below the budget target because of a weaker performance in fixed investment and imports, whereas VAT Refunds are lagging behind also due to slower growth in fixed investment.
• Corporate income tax (CIT) and withholding tax on dividends have surprised on the upside in H1 25, rising by 8.2% (Budget: 6.3%) and 31.1% (Budget: -2.1%), respectively. Mining taxes from gold and platinum companies will start to come through from December as the gold and platinum prices have nearly doubled compared to National Treasury’s projections.
• SARS baseline forecast is to add R100bn to gross revenues from undisputed tax collections and targeting an additional R20bn to R35bn. Commissioner Kieswetter stated in a Parliamentary briefing – reported in Business Day on 29 October 2025 – that the SARS tax take is exceeding the target by R18.0bn.

Forecast +R45bn: PIT in line with budget, net VAT receipts +R12bn, CIT +R37bn, excise duties -5bn.

5. Expenditure developments

We are monitoring three developments:

• Targeted and Responsible Savings (TARS) and spending reviews
• Non-interest spending
• Debt-servicing costs

• With the budget that was only passed in July 2025, spending lagged the budget target until August. However, there was a ramp-up in spending in September, with a large disbursement to the Department of Transport. However, noninterest spending has risen by only 5.2% YoY (T: 7.1% YoY). Disbursements to departments, such as Education, will increase in the coming months. We have therefore not made any meaningful adjustments to our assumption of noninterest spending.
• Debt servicing costs could be revised lower. The decline in T-bill rates of ~75bps, an outstanding portfolio of ~R570 bn, combined with a decline of 160 basis points in SAGB yields in the belly of the curve, and more than 200bps points in 12+ year yields will lower debt servicing costs by ~R8 bn. However, the issuance of approximately R50bn in floatingrate notes (FRNs) could mitigate some of the effect, although the MTEF period may see larger downward revisions.

Spending reduction: Minor contraction

MTEF projection in the context of a potential change in the inflation target and spending reviews: A key focus area will be more detail about spending reviews and to foster greater consensus and implement the new Targeted and Responsible Savings (TARS) initiative, aligning with updated priorities. The upcoming November 2025 MTBPS will incorporate some of these proposals.

6. Sovereign ratings

Sovereign credit rating reviews by S&P (14 November) and Moody’s (5 December) will take place against a backdrop of several constructive developments. The macroeconomic framework and external position have strengthened further, electricity supply has stabilised, Eskom has returned to profit, and regulatory reforms at Transnet are advancing, with RFPs for key rail corridors and the transmission grid in progress. The GNU has remained intact and continues to prioritise fiscal consolidation.

The key missing piece remains a meaningful acceleration in private sector fixed investment – essential for lifting trend growth and broadening the recovery. While the aforementioned positive dynamics support medium-term stability, we do not expect rating agencies to make material changes to their macroeconomic forecasts. Moody’s is likely to affirm its current rating, while S&P’s decision is harder to gauge, but may acknowledge the incremental progress made.

7. Financing of the gross borrowing requirement: Will a large cash balance allow for an earlier reduction in FIX bond issuance?

National Treasury’s FY25/26 financing strategy has had to navigate two key risks: weaker GDP and tax revenue outcomes relative to target, and a sizeable R99bn redemption of the R010 (R008) in December 2025, owing to the bond not being split in advance. To manage the redemption risk, Treasury has conducted switch auctions totalling nearly R30bn since April 2025, reducing the R186 outstanding amount from R325bn to R298bn. It has also front-loaded funding through increased issuance of FRNs, raising R69.9bn between April and October – already ahead of our full-year estimate of R51bn and above last year’s total issuance of R65.3bn. Lower SAGB yields across the curve and the introduction of higher-coupon new issues will help limit the overshoot in the bond discount cost, now projected at around R30bn (versus ICIB’s estimate of R39bn). We estimate that cash funding is currently running about R53bn ahead of target, though this surplus could narrow to roughly R30bn by March if monthly FRN issuance averages R4bn.

ICIB expectations: SAGB supply will remain unchanged.