By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
2025 MTBPS in a nutshell
National Treasury has published the 2025 Medium-Term Budget Policy Statement (MTBPS), reflecting on progress in reforms and the fiscal outlook. Critically, the Minister of Finance, Enoch Godongwana, has endorsed a 3% inflation target with a 1-percentage point (ppt) tolerance band, aligning South Africa closely with other emerging markets such as the Philippines, Mexico, Colombia, and Hungary (See Figure 1). The target is expected to be achieved by 2027, in line with the monetary policy implementation horizon. This milestone underscores strong policy coordination and provides certainty that lower, and stable, inflation expectations are necessary for balanced and sustainable growth.
The lower inflation target should create space for further interest rate cuts, which we expect to materialise next year. Treasury's own projections reflect a repo (policy) rate trajectory that falls to 6.75% by end of 2026 and 6.25% by end of 2027. Importantly, both the Minister of Finance and the South African Reserve Bank (SARB) Governor, Lesetja Kganyago, are aligned on the short-term challenges of achieving a lower inflation target and the long-term benefits of low and stable inflation. According to Treasury, in the short term, the lower price level reduces nominal GDP and government revenues, negatively affecting fiscal balances (See Figures 2 & 3). However, expenditure linked to inflation adjusts downward, offsetting some of the fiscal deterioration. Over the long term, lower interest rates that accompany the inflation target support higher investor confidence and reduce borrowing costs for households, businesses and government, improving debt sustainability and creating a foundation for stronger, more predictable economic growth.
Government's medium-term growth strategy remains anchored in four pillars: maintaining macroeconomic stability; implementing growth-enhancing structural reforms through Operation Vulindlela (OV) to alleviate constraints on network industries and the visa regime, with further progress being made in other priority areas under OV 2.0; building a capable state where OV 2.0 is advancing reforms to address dysfunction in local government, improve urban housing and transportation, and develop public digital infrastructure; and supporting growth-enhancing public infrastructure investment to unlock productivity and long-term economic potential.
Revenue performance and projections: Gross tax revenue is projected to be R19.7 billion higher than Budget 3.0 estimates for 2025/26, supported by robust VAT, corporate, and dividend tax collections. Personal income tax receipts are slightly below expectations. Despite the 2025/26 overrun, gross tax receipts are expected to be R15.7 billion lower between 2026/27 and 2027/28 due to downward revisions in the tax base amid a lower inflation regime.
Over the medium term, sustained economic growth alongside continued gains in tax compliance and administration will be critical to strengthening the revenue performance. Near-term tax buoyancy has been revised slightly higher, reflecting strong tax revenue growth, lower nominal GDP, and improved compliance and enforcement. Gross tax revenue is projected to grow by 8.1% in 2025/26, averaging 6.1% between 2026/27 and 2028/29.
In-year expenditure adjustment and projections
Non-interest expenditure has been revised upward by R15.8 billion for 2025/26, mainly by tapping into the contingency reserve for priority projects such as Transnet freight rail rehabilitation, parliament rebuilding, Sentech TV signal migration, and municipal elections. Debt service costs are lowered by R32.6 billion between 2026/27 and 2027/28.
Compensation of employees is projected to grow by 4.1% per year to R920.9 billion by 2028/29, consistent with the current 2025 multi-year wage agreement, which provides certainty over budget allocations in 2026/27 and 2027/28. However, to avoid crowding out essential service delivery, future wage agreements beyond the current one will need to be tightly aligned with inflation, particularly if the wage bill is to remain sustainable.
Importantly, budget reforms are underway to curb expenditure pressures, and these include, among others:
Infrastructure and economic development remain a key focus with capital asset payments expected to grow fastest over 2026/27-2028/29, at 7.3% per year, rising from R127.8 billion to R157.9 billion, mostly for buildings and other assets. Consolidated public-sector spending on economic development, including infrastructure, industrialisation, exports, and agriculture, is projected to grow 5.0% per year, with infrastructure alone expanding by 6.5% per year to R199.2 billion by 2028/29. This reflects government's policy shift toward growth-enhancing and job-creating activities. Private-sector participation in infrastructure programmes is being actively encouraged (See Appendix for broader public-sector infrastructure measures).
Fiscal balance gradually narrows and debt peaks in 2025/26, declining thereafter
The main budget deficit is expected to shrink from 4.5% of GDP in 2025/26 to 2.7% by 2028/29. The primary balance is projected to record a surplus of 0.9% of GDP in 2025/26, rising to 2.5% of GDP by 2028/29. Gross debt is expected to peak at 77.9% of GDP in 2025/26, then decline steadily to 67.9% by 2033/34. The debt trajectory is however, slightly higher compared to the 2025 Budget 3.0, reflecting the denominator effect not fiscal recklessness (See Figure 4). Government's gross borrowing requirement is expected to amount to R568.2 billion in 2025/26, averaging R464.1 billion over the 2026/27 and 2028/29 period. Treasury will receive an additional R31 billion from Gold and Foreign Exchange Contingency Reserve Account (GFECRA) deductions, which will be added to the R25 billion already earmarked for 20226/27 to reduce the borrowing requirement.
Overall, the 2025 MTBPS represents a targeted fiscal adjustment that allows for the channelling of funds to infrastructure recovery, institutional rebuilding, and election readiness, while maintaining fiscal discipline through offsetting savings. This sustained fiscal discipline, together with the reaffirmation of the 3.0% inflation target, should be credit positive. Markets will be watching closely for S&P's ratings decision on Friday, which comes two days after the Budget. Our view is that while a one-notch upgrade is more likely next year, there remains a reasonable chance of an earlier positive surprise in Friday's announcement.
Investment Implications
On balance, the MTBPS was more positive for bonds than for equities although it will be perceived as largely market positive.
For bonds:
For equities:
As the minister spoke, the rand strengthened from about R17.14 to the US dollar to as low as R17.05, and bond yields fell at the short end and notably at the long end of the curve (R2 040 and R2 044). The short-end move will have been a function of the endorsement of the lower inflation target that is expected to anchor short-term rates at lower levels longer term. Strength in the long end will have been largely a response to confirmation of lower funding requirements (issuance) because of better revenue and expenditure outcomes and good treasury management. The JSE reacted positively at a headline level but the SA Inc leaning indexes like the Mid-Cap Index and the Financials Index showed notable strength during and after the delivery of the MTBPS.
Appendix: Update on infrastructure measures to strengthen delivery and attract private sector participation
