Mpho Molopyana, Chief Economist, and Sifiso Mkwanazi, Economist, at Alexforbes

Headline takeaway

The Finance Minister’s endorsement of a lower inflation target (3% ±1ppt) marks a significant policy shift, aiming to anchor inflation expectations and support long-term economic growth.

Key highlights

Revenue and Expenditure

• Revenue outlook
  • Lower inflation means lower nominal Gross Domestic Product (GDP), which weighs on revenue growth and results in a slightly less favourable debt-to-GDP ratio in the short to medium term.
  • However, higher-than-expected revenue collections in the first half of the year (up R17.5bn) are helping to offset some of these pressures, thanks to strong fuel and corporate income tax collections and lower value-added tax (VAT) refunds.
  • Treasury has not yet decided whether to withdraw the R20bn in additional tax increases proposed in the 2025 Budget—this will be announced next year.

• Expenditure commitments
  • Expenditure estimates for FY2025/26 have been revised up by R15.8bn, mainly to fund infrastructure (notably freight rail rehabilitation) and preparations for the 2026 municipal elections.
  • Over the medium term, Treasury identified R6.7bn in savings from the Targeted and Responsible Savings (TARS) initiative and R3.5bn per year from the Early Retirement Programme.

Budget figures

• Debt and deficit
  • Debt-to-GDP is expected to stabilize this year, but at a slightly higher level (77.9% vs. 77.4% previously).
  • The main budget deficit is projected to remain steady at 4.5% of GDP in FY2025/26, narrowing to 3.2% by FY2027/28.
  • The gross borrowing requirement is R20bn lower for FY2025/26, thanks to better revenue, lower debt service costs, and lower redemptions.
  • Treasury will reduce weekly fixed-rate bond issuance by R750mn to R3bn; inflation-linked bond issuance remains at R1bn.
  • An additional R31bn will be tapped from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) balance in FY2026/27 to further reduce borrowing needs.

• Growth and inflation
  • Real GDP growth is projected at 1.2% for this year (down from 1.4% in the 2025 Budget), reaching 2% by 2028.
  • Headline inflation is forecast to average 3.3% this year, tapering to 3.2% in 2028.

Market and investment implications

• The lower inflation target paves the way for permanently lower interest rates, supporting household spending, investment, and job creation.
• Lower inflation is positive for bond valuations (as yields compress), domestic equities (due to lower discount rates), and the property sector (from lower interest costs).
• A more stable currency is expected as inflation differentials narrow relative to peers and trading partners.

Risks and outlook

• Fiscal consolidation could be challenged by weaker growth, spending pressures, or shifts in investor sentiment.
• S&P’s sovereign rating decision (expected 14 November) will be a key event—there is optimism for a possible upgrade, but confirmation may only come after the 2026 Budget if debt stabilisation is evident.

Our take

• The Finance Minister’s move to a lower inflation target is a positive step for South Africa’s long-term economic health. If the SARB achieves this target, we could see permanently lower interest rates, reduced inflation volatility, and improved competitiveness for the country. This environment is supportive for bonds, equities, and property, and should help create a more stable currency.
• However, there are still risks. Fiscal consolidation depends on continued revenue growth and careful management of spending pressures. Political and economic uncertainties remain, and the upcoming S&P rating decision will be important to watch.
• For pension fund trustees and advisors, it’s important to review return and income assumptions in light of the new inflation target. Our team will continue to monitor developments and adjust strategies as needed to protect and grow your investments.

ENDS