by IZAK ODENDAAL

The 2026 Budget Speech for once will have a positive backdrop across four key dimensions

  • Global uncertainty has given rise to a precious metals boom – and a tax windfall for SA.
  • Domestic political stability – GNU has wobbled but is holding on, and a repeat of last year’s Budget drama is unlikely.
  • Progress on fiscal consolidation and economic reforms – SA has moved from the promises phase to the delivery phase and improving growth and fiscal discipline is stabilising the debt ratio.
  • Bond market rally – lower borrowing costs will lead to savings on interest payments, but also signals investors’ stamp of approval.

Nonetheless, a substantial fiscal challenge remains, with an elevated interest burden, persistent spending demands and economic growth rates that are still too low to ensure long-term debt sustainability.

Macro backdrop

Global markets stable, but precious metals reflect concerns

Apart from the big “Liberation Day” sell-off, global markets have been relatively stable. However, the dollar is weaker since the start of 2025, while gold and PGM prices have increased sharply.

EM credit spreads have tightened, SA bonds have rallied Lower borrowing costs driven by a combination of domestic factors (rate cuts, lower inflation) and a global narrowing of emerging market spreads. The decline in bond yields will somewhat reduce the government’s debt service burden if it is sustained.Consumers leading the SA growth recovery Fixed investment spending remains weak, and is likely to end the year in negative territory. While the consumer outlook remains reasonably healthy due to lower inflation and falling interest rates, a step-change in South Africa’s economic growth rate can only happen if fixed investment spending grows meaningfully. Accelerated supply-side reforms, including through Operation Vulindlela, are necessary to crowd in private sector investment in electricity, logistics, water and other forms of infrastructure spending. Public sector capex spending is projected to rise over the medium, but delivery faces capacity constraints.Gradual rate declines as SARB beds down 3%

target

History suggests the new target is achievable over time, as expectations anchor near 3%. But with inflation already close to target and projected to remain near 3%, and a compression of the country risk premium, the MPC has lowered the repo rate with around 50 to 75bps of further cuts expected this year.

The outlook for structurally lower interest rates in South Africa has resulted in a rally in rate-sensitive assets.The ongoing fiscal challengeTight fiscal policy bearing fruit Treasury has maintained a primary surplus (revenue > non-interest spending) for the past two years, and projects this to increase over the medium term. This in turn will stabilise government’s debt-to-GDP ratio around 78%, gradually reducing the debt-service burden. Markets have responded positively, and one of the major ratings agencies upgraded the government’s credit rating. The others are likely to follow in due course – but want to see evidence of ongoing fiscal discipline and faster economic growth.But the core fiscal challenge remains:

r > g

Government’s borrowing cost (r) remains above the nominal GDP growth (g), as has been the case from around 2015. Long-term fiscal sustainability requires that borrowing costs should be in line or below nominal growth. However, until recently there was a vicious cycle of high borrowing costs depressing economic growth, which limited tax revenue, raised risk premia and put further upward pressure on borrowing costs. Reversing this feedback loop is crucial, and we appear to be in the early stages of this happening.Debt service burden remains high.

It is ultimately the debt service burden – the proportion of revenues required to make ongoing interest payments – that really matters, not the absolute level of debt. SA’s overall debt-to-GDP ratio is not excessive by global standards, but its debt service burden is too high. With c.20% of tax revenues spent on interest payments, other spending items in the budget are squeezed out. South Africa lowered its debt service burden in the early 2000s through a combination of better tax compliance, spending discipline and strong economic growth. It is attempting to do the same, partly through limiting wage bill growth.SA cannot tax its way to fiscal sustainability

The tax-to-GDP ratio is already high compared to other countries, and the tax base is narrow. SA individual taxpayers have seen a rising tax burden over the past decade, and pay high shadow taxes,(private security, private health, private education). The one area where there is room for higher tax rates is VAT. The 15% rate is low by global standards, and is likely to rise over time. However, given last year’s GNU conflicts and the current tax revenue overrun, an increase this year is very unlikely.

Company taxes can also rise as corporate profitability improves, and will be boosted by the precious metals boom. The brief 2022/23 commodity price spike lifted company tax revenues by around 1%ppt of GDP compared to pre-Covid levels. Recent Fiscal TrendsTax revenue overrun for the 2026 fiscal year Nine months into the 2026 fiscal year, growth in overall tax revenue is tracking ahead of the full-year target, while expenditure growth is lagging the budgeted growth rate (chart left).

In terms of the main tax items, VAT and company tax (CIT) revenues have grown faster than the budgeted full-year growth rate, but personal income taxes are lagging somewhat. VAT, PIT and CIT are the three biggest sources of tax revenue.

As at 31 Dec 2025Better budget deficit profile The budget balance profile is improving compared to previous years, but is still likely to end in a sizable deficit for the 2025/26 fiscal year. However, the deficit is now entirely made up of interest payments (circa R350bn per year).

As the next slide shows, the primary balance is in surplus.Primary surplus on track A primary surplus means that revenue exceeds non-interest expenditure. This is the first step to stabilising the debt-ratio. FY2026 is on track to deliver the third consecutive primary surplus.

Maintaining a primary surplus is usually politically difficult, especially when a country has pressing spending needs. A fiscal anchor could reduce concerns that a future government could backtrack on fiscally sustainable policies.Expectations and implicationsBudget 2026 expectations: growth, ongoing fiscal consolidation, and being sensible with the mining windfall

  • Political stability – A repeat of last year’s Budget drama is unlikely, with broad GNU agreement on Budget priorities. Despite looming local government elections, the Budget is likely to show ongoing commitment to fiscal consolidation – and not vote-buying populism.
  • Emphasis on reform – The Finance Minister will be able to point to lower bond yields and ratings upgrade as evidence that the market is recognising reform (including Operation Vulindlela), and that government must maintain momentum. This will echo the emphasis in the SONA. Ultimately, SA cannot rely on commodity windfalls. It must build a competitive economy and business-friendly environment.
  • Improving economic growth profile – 1.5% to 2% medium term growth is high by SA’s recent standards, but not compared to other emerging markets. Investment must be unlocked to sustain higher growth, however, and the Budget will again place emphasis on public infrastructure spending and on crowding in private investment.
  • Conservative provision for tax revenue overrun – the precious metals boom is likely to lead to a tax overrun in FY26 and FY27, with estimates varying between R15bn and R80bn. However, given the cyclical nature of commodity prices, Treasury will likely be cautious in how this is incorporated into the medium term projections. Nonetheless, it means that any planned tax increases will be postponed. o The tax revenue overrun will likely be mostly allocated to debt reduction, but some of it will be put to increased funding to front-line services in line with last year’s positioning.
  • Somewhat smaller budget deficit compared to MTBPS projections, with a growing primary surplus (ex interest payments). This should lead to debt stabilisation in line with MTBPS projections.Other macro matters to watch
  • Fiscal anchor – Treasury has been advocating for the introduction of a fiscal anchor, a legislated rule that binds government to certain fiscal policy principles. Fiscal anchors can add credibility and predictability to policymaking, and could ease concerns that the current progress won’t be undone by future governments. Ultimately, though, they are only as good as the political will to abide by the rule, and investors will still pay attention to the political landscape.
  • SARS collection capacity – SARS received increased funding last year to beef up enforcement, debt collection and investment in technology. If this delivers as expected, it could ease concerns of near-term tax increases. The 2025 Budget pencilled in R20bn in additional tax increases should SARS fail to improve collections meaningfully. For now, the precious metals boom makes this unlikely, but the threat still lurks in the background.
  • Update on TARS – Treasury introduced its Targeted and Responsible Savings programme during the MTBPS year to cut expenditure by closing or consolidating underperforming or duplicate programmes and projects (instead of going the route of “zero based budgeting”). It should be able to announce significant spending savings this year.
  • National Health Insurance, SOE support and elevated municipal debt levels remain longer-term risks to fiscal sustainability, but can be managed in a pragmatic fashion. o The minister is likely to stick to the no-bailout/tough love stance for SOEs and local government, and echo the president’s tougher SONA stance on municipal performance. This includes local government ringfencing utility income and meeting performance criteria to access grant funding. o On NHI, the Minister has recently called for a “truce” over the deep disagreements plaguing this policy. Sensible compromises can take this policy forward. o It should also be noted that government also has considerable assets (including a large property portfolio) where value can be unlocked over time to reduce fiscal risks.Markets have already adjusted to an improved outlook Symmetry is shifting its tactical positioning on SA bonds from overweight to neutral following the strong rally. However, even at these levels, the medium-term real return outlook is positive. The rand has also moved into fair value territory, but can still rally if the dollar weakens further.Investment implications
  • Overall, the Budget is likely to be well-received by the market, but expectations are quite high and the scope for meaningful bond rally is limited given the rerating that has already taken place this year. Beyond that, there are unlikely to be significant asset allocation implications (no further changes to Regulation 28 are expected, for instance).
  • Similarly, the Budget will not necessarily deliver enough to lead to further ratings upgrades in the short term, but should contribute to upgrades over the next 12 to 18 months. Ratings agencies are not just focused on fiscal policy, but also place great emphasis on faster economic growth rates to ultimately underpin debt sustainability. Therefore, a ratings upgrade cycle requires evidence of structurally higher economic growth.
  • There is considerable global uncertainty and several domestic risks to the fiscal outlook, and much work to be done on economic reforms, but the 2026 Budget takes place with a genuine improvement in South Africa’s economic prospects, and should confirm ongoing commitment to sensible macro policies.
  • This is ultimately positive for domestic financial markets. SA markets are no longer cheap, but the real return outlook over the medium term remains attractive.