By Farzana Bayat, Portfolio Manager at Foord Asset Management

With Finance Minister Enoch Godongwana set to deliver the 2025 Budget Speech tomorrow, all eyes are on whether South Africa’s Government of National Unity (GNU) has had any meaningful impact on the fiscus.

While there was much optimism with the formation of the GNU last year, we have yet to see this translate into meaningful growth and fiscal benefits. A growth rate above 2.5% would be necessary for debt stabilisation in South Africa. Growth in 2024 dwindled at sub 1% despite improvements in Eskom’s performance – the lower real growth rate coupled with muted inflation last year has not helped debt metrics, with debt to GDP seen rising to around 76%. The fiscal deficit is projected to remain just under 5%.

With that said, we do not anticipate any major surprises in this year’s budget. We would forecast mild fiscal slippage, no firm fiscal rule implemented and unchanged bond issuance. While revenue may see a slight overshoot, spending pressures remain, particularly from wages and SOE support. Treasury is sitting with a large cash buffer and could justify cutting bond issuance, but we believe they will likely take a cautious approach (and keep issuance unchanged) given large upcoming bond redemptions and potential SOE bailouts.

Revenue and spending

Revenue collection is expected to see a slight overshoot, with gains in personal income tax and VAT due to tax windfall from early 2 pot retirement withdrawals. However, corporate income tax will likely come in lower due to weaker GDP growth.

On the spending side, the wage bill is higher than Treasury’s forecast, with wage increases coming in above inflation.  Offsetting this is lower debt service costs which have decreased slightly as older debt is refinanced at lower rates – this is on the back of the strong rally in bonds (reduced country risk premium) post the formation of the GNU. In the outer years there is a risk that the current SRD (Covid grant) be converted into a basic income grant which will need to be matched with a new revenue source – however we don’t expect any announcement in this budget.

State-Owned Enterprises (SOEs) funding pressure

SOEs and municipalities remain under financial pressure and will require continued bailouts/guarantees. Transnet is requesting a cash bailout similar to what Eskom received - National Treasury has pushed back against this in the past and granted Transnet a R47bn guarantee which has now been exhausted. They are looking for a further R50bn cash injection which we think will come via additional guarantees rather than a cash injection. Eskom may need further support as municipal debt owed to Eskom has climbed to R100bn.

Debt Issuance

The bond market rallied sharply post the formation of the GNU (on the back of a declining country risk premium). Lower bond yields have meant that bond prices have increased - with increased bond prices, the cash that has flowed to NT from bond issuances has increased leaving them with a fairly large cash buffer. While the high cash buffer means NT can potentially reduce bond issuance, we believe they will leave issuance unchanged and build a buffer for large upcoming debt redemptions in the coming years as well at the R70bn Eskom debt swap taking place this year.

Unchanged bond issuance and muted changes in fiscal metrics mean we can expect a fairly muted market reaction to the budget.

Economic growth and debt

South Africa has a growth problem - we have grown at sub 1% over the past decade and that coupled with rising deficits has led to debt metrics rising from 30% a decade ago to over 70% currently. For every R100 collected in revenue, more than R20 goes to servicing debt – which means less money available for more pertinent spending like on health, education, etc.  

In order to see any meaningful shift lower in our debt metrics, we need meaningful structural reform that can spur growth - a growth rate in excess of 2.5% is required for debt stabilisation. The market has pinned high expectations on the GNU providing some green shoots – but this is proving to be a slower process than expected. The stability of the GNU is also coming into question. The next 2 years see the municipal elections in 2026 as well as the 2027 ANC elective conference where there is uncertainty on who will succeed Ramaphosa, which means heightened political risks to resume.