Johann Els, Chief Economist at PSG Financial Services

Revenue and fiscal outlook

Tax revenue is running well ahead of expectations, and it is not just mining taxes benefiting from higher precious metals prices. The improvement is broad-based, with personal income tax and VAT also holding up well.

The tax overrun could reach R50bn or more, which is a significant improvement on the numbers in the February Budget.

The budget deficit could narrow to around 3.5% of GDP (this fiscal year), compared with the 4% expected in the February Budget.

The primary budget surplus could also be larger than expected – around 1.9%, compared to the 1.4% of the February budget. This would help put government debt on a more sustainable path.

Treasury caution and reform progress

However, the better numbers are unlikely to be fully sustained. The economic backdrop remains difficult, growth is weak and some of the revenue boost reflects higher commodity prices. Treasury is unlikely to build the full revenue overrun into its forward projections.

We should not expect Treasury to show all the good news. It will probably remain cautious about how much of the current improvement it carries into future years. This is understandable, given the uncertain economic outlook and pressure for more government spending. There is also uncertainty around a potential further fuel levy relief, but the April to June relief already cost R17bn.

The bigger picture is nevertheless encouraging. South Africa is making slow but steady progress on policy and structural reforms. Combined with improving fiscal discipline, this is helping to cement the path towards a lower debt-to-GDP ratio.

Ratings outlook

Ratings agencies should welcome this progress. The better fiscal numbers help, but so does the evidence that the improvement is not only about higher commodity prices. The expected proposals around a fiscal anchor should also be positive for confidence in the medium-term fiscal outlook.

Further ratings upgrades are likely to occur, but the question is whether we see more action after the MTBPS or whether the agencies wait for confirmation in the February 2027 Budget.

South Africa could be back in investment-grade territory within two to three years, with at least one or two of the three major ratings agencies potentially upgrading the country back to investment grade.

Bottom line

The revenue windfall is partly cyclical and won’t last forever. But the combination of better fiscal numbers and gradual structural improvements is strengthening the case for a sustained improvement in South Africa’s sovereign credit rating.

ENDS