South Africa’s Budget Marks Turning Point With Debt to Peak

By S'thembile Cele and Monique Vanek

South Africa’s debt will peak this fiscal year after rising for nearly two decades, a turning point that creates space to support the economy through tax relief and infrastructure investment. Government bonds rallied.

“For the first time in 17 years, debt will stabilize and it will continue to fall,” Finance Minister Enoch Godongwana told lawmakers in Cape Town on Wednesday.

“The budget deficit has narrowed significantly, and debt-service costs are also falling. The world has taken notice,” he said, citing the country’s recent credit-rating upgrade and bond market rally.

The budget could strengthen the case for further upgrades and the National Treasury said it was proactively highlighting the nation’s improved fiscal credibility.

Economists expect Fitch Ratings and Moody’s Ratings to shift the country’s outlook to positive when they deliver their next assessments.

The rand extended gains to trade 0.8% stronger against the dollar by 3:22 p.m. in Johannesburg and government bond yields fell sharply on news of a reduction in planned issuance, dropping below 8%. The benchmark FTSE/JSE Africa All Share Index climbed 1.5% to a record high.

“Quite a solid budget that has delivered on fiscal consolidation expectations,” said Sebastian Holzbach, fixed-income analyst at Northstar Asset Management. “The National Treasury has been conservative on revenue projections given the commodity windfall, which is prudent given its cyclical nature.”

Yields on the benchmark 10-year government bond have declined more than 300 basis points from an April 2025 peak above 11%, while the rand has strengthened more than 20% against the dollar over the same period.

The Treasury announced a decrease in competitive fixed-rate bond auction amounts by 450 million rand ($28 million) to 2.55 billion rand, effective March 31, according to a seperate statement.

The 2026 Budget Review showed the ratio of debt to gross domestic product peaking at 78.9% in 2025-26, slightly higher than the 77.9% estimated in November due to weaker nominal GDP and increased borrowing, which the Treasury said was aimed at taking advantage of favorable financing conditions.

As a result, debt-service costs will grow more slowly than overall spending for the first time this decade. That will lower debt payments as a share of revenue to 20.2% by 2028-29 from 21.3% this fiscal year.

To entrench a commitment to healthy public finances, the government aims to propose a “principles-based” fiscal anchor by October when the Treasury delivers a budget update.

In the absence of the debt rule, the Treasury has targeted a primary budget surplus, which excludes borrowing costs. It will post a third successive positive balance this fiscal year at 0.9% of GDP, unchanged from November’s forecast, and expects the measure to widen to 2.3% by 2028-29.

South Africa has benefitted from a commodities boom that drove mining profits sharply higher, lifting corporate income tax and royalties from gold and other minerals.

“The metals rally has been sudden and they have not included much benefit from taxes and royalties,” said Rashaad Tayob, a portfolio manager at Foord Asset Management. “If they stay around these levels, revenue should be around 30 billion rand higher in the coming years which will be very positive.”

The improved fiscal outlook, together with a revenue overshoot of 28.8 billion rand compared with the 2025 budget forecast, gave the government scope to scrap a 20-billion-rand tax hike it had penciled in for this year.

It also allowed it to adjust income-tax brackets higher for inflation for the first time in three years, preventing so-called bracket creep, and increased medical tax credits.

Annual tax-free investment limits were also increased by 10,000 rand, while the tax regime for small businesses was eased among a range of other measures. That marks a shift from last year’s budget, when divisions within the governing coalition over proposed tax increases forced the Treasury to revise it three times.

This year, broader political backing for a framework centered on spending restraint and shifting outlays from consumption toward investment should smooth its passage through parliament.

Capital payments are now the fastest-growing expenditure category, increasing at an annual average of nearly 10% over the next three years, according to the review.

As expected, the consolidated budget deficit will narrow this fiscal year to 4.5% of GDP from a previous forecast of 4.7%.

Those steps, along with ongoing reforms to local government and the nation’s frayed energy and logistics infrastructure, are expected to boost economic growth to 2% by 2028 from 1.6% forecast for this year. Still, risks remain, including struggling state-owned companies and ballooning municipal debt.

— With assistance from Mpho Hlakudi, Robert Brand, and Paul Richardson