Godongwana signals fiscal shift as revenues exceed expectations

Key topics:South Africa set for mid-term budget amid stronger revenue and lower deficitInvestors eye bond yields, credit rating upgrade, and 3% inflation targetExtra revenue may fund infrastructure, reforms, and Transnet support.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By By Ntando Thukwana and Rafael Gayol.South African Finance Minister Enoch Godongwana is heading into his latest budget with a rare sense of optimism — and the chance to mark a turning point for the nation’s long-strained public finances.After years of rising debt and missed targets, stronger-than-expected revenue collections and restrained government spending have given the National Treasury room to breathe. A surge in mining profits, driven by buoyant commodity prices, has boosted revenue, while delays in approving the budget earlier this year — caused by wrangling over tax hikes within the new coalition government — inadvertently curbed expenditure.There’s no expectation of a similar fight when Godongwana delivers his medium-term budget update at 2 p.m. in Cape Town, with revenues in decent shape and tax changes not typically part of Treasury’s mid-cycle review.Investors have already taken the hint, boosting the rand, lifting the FTSE/JSE Africa All Shares Index 46% in dollar terms so far this year and driving government bond yields sharply lower. .Read more:.South Africa’s Budget 3.0 set to pass as coalition unites on tax plan.Portfolio managers are also weighing the prospect of a credit-rating upgrade and an endorsement from the finance minister of the central bank’s preference to aim for 3% inflation, in addition to the brighter budget outlook.Economists surveyed by Bloomberg expect tax collections to exceed Treasury’s May forecast of 1.985 trillion rand ($116 billion) by 20 billion rand in the year through March 2026. That’s likely to lower the consolidated budget deficit to 4.5% of gross domestic product, better than the Treasury’s 4.8% projection.“This is a turning point. This really is a significant inflection point,” said Andrew Matheny, economist at Goldman Sachs Group Inc. He sees revenue outperforming by as much as 55 billion rand, or 0.7% of GDP, which could “take the deficit quite a bit narrower.”When Godongwana delivers the budget update to lawmakers, investors will be watching for signs that the extra revenue is being used to cement fiscal consolidation.The improvements in South Africa’s public finances and overall debt metrics “will be very much key to investor sentiment across the board,” Casey Sprake, economist at Anchor Capital said. “It’s very much the one measure that’s sort of hampering a renewed positive focus on South Africa.”With improved value-added tax receipts and more solid personal and corporate income tax collections, “the near-term fiscal picture appears comparatively healthy,” she said..The stronger position gives Godongwana scope to channel funds toward infrastructure and reform priorities, critical to lifting South Africa’s growth rate out of inertia. He will also be watched for any help to embattled state-owned ports and rail firm Transnet SOC Ltd., which is seeking additional financial support.“It’s part of the infrastructure story, and there may be additional money going towards it,” said Frank Blackmore, lead economist at KPMG in South Africa. “But there will be more emphasis on private sector coming in with their money.” The mid-term budget will also be scrutinized for the politics around the spending choices by the governing coalition.The so-called government of national unity — formed by the African National Congress with nine other parties after it lost its outright majority in elections last year — needs to demonstrate policy credibility to sustain a rally in government bonds and lure back fixed investment which has been fading.Inflation TargetThe rally since the GNU was formed has reduced yields on the government’s 10-year benchmark by 255 basis points. And while some of that gain reflects broader demand for emerging-market assets, South Africa’s performance has stood out, with the central bank’s loud advocacy for aiming inflation at a lower target also boosting sentiment..Read more:.Goldman predicts South Africa’s sovereign rating upgrade amid strong budget.Economists expect the finance minister to endorse the 3% inflation goal, formalizing a shift announced by the central bank in July. It would be the first adjustment to the framework since the current 3% to 6% target range was introduced in 2000 and a step toward entrenching lower price pressures and borrowing costs.Markets are also betting that a narrower deficit will allow Treasury to scale back domestic bond issuance, relieving pressure on yields. Bank of America Corp. reckons Treasury has room to reduce fixed rate issuance by as much as 250 million rand per auction.Investors will be watching the debt strategy closely, Matheny said. “They might want to proceed cautiously” to see if the fiscal improvements are sustained, he said.Ratings UpgradeSouth Africa’s removal from the Financial Action Task Force’s gray list last month, improved fiscal metrics and political stability within the coalition government have lifted hopes for a credit ratings upgrade when S&P Global Ratings releases its review on Friday. Four of eight economists in a Bloomberg survey predict an upgrade.Still, economists caution that one strong year doesn’t guarantee a fiscal turnaround. Sustained primary surpluses — where revenue exceeds non-interest spending — are needed to make a meaningful dent in debt levels, which are projected to peak this fiscal year at 77.4% of GDP by Treasury.“It’s not a foregone conclusion that what we’ve seen so far will translate into improved credit ratings,” said Jee-A van der Linde, senior economist at Oxford Economics. “But on the balance of risk it is more optimistic.”.© 2025 Bloomberg L.P.

Godongwana signals fiscal shift as revenues exceed expectations

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