The 2025 National Budget, initially scheduled for 19 February, was postponed amid what many are saying is a disagreement within the Government of National Unity (GNU) regarding various factors, including but not limited to proposed tax increases. This delay underscores the political complexity of aligning fiscal priorities within the coalition and represents a critical test for the GNU’s cohesion.
Given South Africa’s economic and fiscal constraints, the budget’s stance on tax policy, infrastructure investment, and state-owned entity (SOE) support carries significant implications for investors and economic stability.
What Has Transpired Between the October 2024 MTBPS and Now?
Since the Medium-Term Budget Policy Statement (MTBPS) in October 2024, both external and domestic conditions have evolved.
External Factors:
Uncertainty in global macroeconomic forecasts continues, particularly with the potential return of President Trump’s policy agenda in the U.S. Possible tariffs and policy shifts could impact South Africa’s trade partners (China, Europe), affecting capital flows and currency stability. Additionally, the increased risk premium on South African assets due to U.S. policy stance and global growth concerns remains a consideration.
Domestic Factors:
The GNU remains intact but faces increasing policy coordination challenges. Inflation remains benign, supporting real disposable income, while GDP growth expectations are cautious, with National Treasury projecting 1.7% for 2025. Although business confidence has improved marginally, infrastructure execution continues to pose challenges. Fiscal affordability rulings impact social relief measures, with pressure to extend the Social Relief of Distress (SRD) grant. The debate over targeting a primary surplus as a fiscal anchor also persists.
Key Issues Worth Watching
Revised Public Private Partnerships (PPP) Framework: The consolidation of infrastructure financing entities and regulatory amendments to facilitate private-sector participation.
Consumer Spending Trends: The impact of the two-pot pension system and post-pandemic recovery patterns.
Government Borrowing for Infrastructure: Potential increases in debt issuance to finance long-term projects.
Social-Relief-of-Distressed (SRD) Grant: The likelihood of an extension or adjustment given fiscal constraints.
Transnet, Eskom and Municipalities: Key infrastructure and service delivery challenges, including financial distress among local governments.
Revenue and Expenditure Projections: The balance between tax policy adjustments and government spending priorities.
Fixed Investment/GDP Ratio: Monitoring shifts in infrastructure investment as a percentage of GDP.
Tax Policy and SOE Support
The much-debated tax hikes remain a challenge for the Minister of Finance. While proposed increases in VAT and personal income tax rates are under scrutiny, maintaining corporate tax stability is crucial to supporting business confidence.
The government has reiterated its commitment to targeted SOE interventions rather than blanket bailouts. Specific considerations include:
Eskom: Allocations for transmission expansion over the short, medium, and long term.
Transnet: General liquidity support and investment in freight corridor upgrades, with an emphasis on leveraging private-sector funding.
Municipalities: Conditional grant reforms aimed at improving financial sustainability, with a focus on revenue collection and private-sector participation in service delivery.
Infrastructure Investment
The government has reaffirmed its commitment to infrastructure-led growth, with investment prioritised in key sectors:
Water Sector: Significant allocations for water infrastructure, including funding for non-revenue water projects in key metros.
Renewable Energy and Storage: Investments to accelerate South Africa’s energy transition initiatives.
Market Reactions
The announcement of the delay triggered a sharp sell-off across various local asset classes with long-dated nominal bond yields widening by 10 basis points. While equities and the currency have since recovered, bond yields remain wider. Nonetheless, the government must prioritise fiscal discipline and address concerns around debt sustainability and execution risks across key initiatives. Market sentiment towards SOEs, particularly Transnet, will depend on clear financial restructuring plans and private-sector participation. The same applies to the government’s approach to Eskom. While a VAT increase may dampen short-term consumption, it aligns with broader efforts to stabilise public finances.
Looking Ahead
The year 2025 will be a defining one for the GNU, testing its ability to navigate complex economic and political trade-offs. Despite positive signals, such as commitments to infrastructure investment and SOE reform, execution risks persist. For investors, the key focus remains on implementation efficiency, fiscal discipline, and the government’s ability to restore confidence in South Africa’s growth outlook.
By: Conway Williams, Head of Credit at Prescient Investment Management