Haroon Bhorat Chair: Investment Committee at Sygnia

The media coverage of the MTBPS is completely overshadowed by the full Budget that follows it. Yet the MTBPS – at least in a fiscally sound and stable environment – arguably contains all the key information and policy decisions already made by the Minister of Finance before his March speech.

And in many ways, the most recent MTBPS did that and then some: It represented a remarkably positive fiscal policy threshold in President Ramaphosa’s time in office. Crucially, this was signalled by financial markets, as South Africa received a credit rating upgrade for the first time in 15 years (from S&P Global Ratings), moving the economy closer to an investment-grade credit rating.

There are five core features of this turnaround. Firstly, the adoption of a lower, 3 per cent inflation target; secondly, the associated decline in projected debt-service costs; thirdly, a recalibrated debt-to-GDP profile; fourthly, South Africa’s exit from the Financial Action Task Force’s (FATF’s) grey list; and finally, a structurally lower public-sector wage bill. Together, these shifts signal an attempt to move the macro-fiscal regime to a more credible, lower-inflation and lower-risk path, even at the cost of accepting short-term narrowing fiscal space. These shifts are discussed in greater detail below.

The first and arguably most far-reaching policy change was the decision to adopt a new point inflation target of 3%, with a tolerance band of 1 percentage point. While National Treasury and South African Reserve Bank (SARB) officials have clearly been debating it for some time, it did have an air of inevitability. By committing to a lower target – as I argued in a previous Sygnals – the authorities are aiming to shift inflation and inflation expectations to a permanently lower path, creating space for structurally lower nominal and real interest rates over time. However, the MTBPS acknowledges that this is not a free lunch: lower inflation reduces nominal GDP growth and tax revenues and slows the erosion, in real terms, of the existing stock of public debt. Hence, in the short term we will take some “negative nominal effects”, as it were – but it is true that if we ride through this early fiscal period, lower (and more stable!) inflation will bring with it a more competitive real exchange rate, lower cost-of[1]living pressures and a reduced inflation risk premium in domestic asset prices.

The second feature of this threshold point in fiscal policy revolves around debt-service costs, one of the fastest-growing spending items over the past decade and increasingly crowding out social and capital expenditure. The MTBPS has clearly situated the lower inflation target within the broader strategy of reducing the real interest rate at which government borrows, primarily by compressing the inflation risk premium demanded by investors. A credible and well-communicated disinflation path, coordinated between Treasury and the SARB, should, over time, be reflected in lower yields on government bonds, especially at the longer end of the curve, where expectations about future inflation and policy credibility are most important. Thus, as the existing stock of relatively expensive debt is refinanced at these lower yields, the interest bill becomes more manageable and the ratio of debt-service costs to revenue begins to decline relative to previous baselines. The figure from the MTBPS below is arguably one of the most important fiscal policy statements we have seen for some time: It shows that debt-servicing costs as a share of revenue will decline from 21.3% to 20.2% over the medium-term expenditure framework (MTEF).

A third threshold lies in the revised projections for the gross debt-to[1]GDP ratio. On the face of it – as noted above – the new path appears less favourable than that presented in earlier Budgets, with the level of debt-to-GDP now projected to be higher in the short term. The MTBPS is explicit that this is not the result of an underlying loss of fiscal control, but rather a mechanical consequence of adopting a lower inflation path. Nominal GDP now grows more slowly, so while the nominal stock of debt reflects past borrowing and still[1]elevated interest costs, the ratio of debt-to-GDP is pushed up in the transition period. At the same time, lower inflation slows the rate at which inflation erodes the real value of outstanding debt. These forces run counter to the long-term benefits of a lower-inflation environment. However, this high debt-to-GDP profile must be viewed against a rising primary surplus. Yes, you read that correctly! We have now had a year or two of primary surpluses, and these are set to expand over the MTEF period from 0.5 to 2.5% of GDP. Ultimately, though, the MTBPS is asking markets and citizens to accept a temporary “optical” deterioration in the headline debt ratio in exchange for a more sustainable and less inflation-distorted debt trajectory over the medium to long term.

The fourth important feature that drove our re-rating was South Africa’s removal from the FATF grey list. Grey-listing was associated with heightened perceptions of regulatory and governance risk, and its reversal reflects a multi-year effort to strengthen the anti-money[1]laundering and counter-terrorist-financing framework, enhance supervisory capacity and improve enforcement outcomes. From a fiscal and macro-financial perspective, exiting the grey list matters because it helps to normalise South Africa’s risk profile in the eyes of global investors and reduces the non-price frictions that built up around financial flows.

Finally, the MTBPS sets out a threshold shift by reducing the public-sector wage bill. Compensation of employees has long consumed a large and rising share of consolidated expenditure, constraining the ability of the state to fund infrastructure and core social programmes. The MTBPS projects more restrained wage settlements more tightly aligned with the new, lower inflation target; promises to strengthen controls on headcount; and targets reductions in the public-sector payroll. The latter includes the removal of “ghost workers” through improved payroll verification and digital personnel systems, as well as the use of voluntary early[1]retirement schemes and natural attrition to reduce staffing levels in a gradual and socially managed way. The MTBPS is promising a leaner public sector wage bill – whether this will translate into enhanced efficiency is a discussion for another day.

Taken together, these key positive developments in the 2025 MTBPS amount to more than incremental technical adjustments. They represent an attempt to lock in a lower-inflation macroeconomic regime, improve the quality and composition of public spending and reduce the risk premia embedded in South Africa’s sovereign borrowing costs. A massive positive fiscal step in the right direction has been made!

ENDS