Positive and pragmatic MTBPS reveals improved fiscal stability

South Africa's 2025 Medium-Term Budget Policy Statement (MTBPS) struck a noticeably positive and pragmatic tone, signalling government's renewed commitment to fiscal sustainability and a pivot from consumption to growth-enhancing investment.

The most significant takeaway from the 2025 MTBPS is National Treasury’s pledge to restore fiscal sustainability and stabilise government debt. Finance Minister Enoch Godongwana announced that government debt is expected to stabilise at an estimated 77.9% of GDP in the 2025/26 fiscal year. This marks the first time since the 2008 financial crisis that the debt-to-GDP ratio is projected to stop growing, a reversal of a 15-year trend of debt accumulation.

A primary budget surplus (where revenue exceeds non-interest spending) of R68.5 billion - or 0.9% of GDP – is expected in the current year. This surplus is forecasted to grow over the medium term, providing the foundation for debt reduction.

The overall budget deficit is projected to narrow from 4.5% of GDP in 2025/26 to 2.7% of GDP by 2028/29, a level last seen over a decade ago.

Improved tax collections by the South African Revenue Service (Sars) have resulted in tax revenues exceeding budget estimates by R19.3 billion. This unexpected revenue boost strengthens South Africa’s fiscal position without requiring new tax hikes.

Projections for debt-service costs have been revised lower due to factors like reduced interest rates which has eased pressure on the fiscus and freed up funds for critical services.

An important component of the MTBPS is the deliberate re-prioritisation of expenditure towards capital formation and economic growth. This is a shift away from a historical over-reliance on consumption spending. The minister confirmed that capital payments are now the fastest-growing expenditure item over the medium term, projected to increase by 7.5% annually.

Targeted investment initiatives include plans for a minimum R15 billion infrastructure bond issuance aimed at mobilising long-term funding for crucial infrastructure projects targeting institutional investors like pension funds. The bond is aimed at promoting liquidity and channelling savings into infrastructure projects. More liquid, tradeable infrastructure vehicles address a major barrier for retirement funds which tend to avoid illiquid private placements due to redemption risks and valuation uncertainty.

The MTBPS put a strong emphasis on accelerating private sector participation in financing and delivering infrastructure. Initiatives include new guidelines for public-private partnerships (PPPs), a credit guarantee vehicle (developed with the World Bank) to de-risk private investment and the establishment of partnership offices within key departments like Water and Sanitation and Transport.  Efforts to improve the PPP framework aim to build investor trust by ensuring long-term contract stability while expanded PPPs are expected to improve logistics efficiencies and reduce reliance on roads.

National Treasury’s fiscal strategy is explicitly anchored on four pillars: maintaining macroeconomic stability, implementing structural reforms (particularly in energy and logistics), building state capability, and supporting growth-enhancing infrastructure.

The combination of fiscal prudence, debt stabilisation and plans to maintain an inflation target of 3% provides a compelling narrative for credit rating agencies, supporting a potential sovereign rating upgrade. Government announced its intention to shift from short-term expenditure to long-term investment, particularly targeting waste and cost-cutting to improve the fiscal position. This approach reflects a growing maturing in governance, balancing social spending with business-friendly policies.

Decisive steps to stabilise public debt and achieve a growing primary surplus address the core concerns that have kept South Africa's sovereign rating in sub-investment grade (junk status). By narrowing the budget deficit and dedicating resources to infrastructure, the government is signalling its commitment to debt repayment while the focus on structural reforms and infrastructure investment is designed to lift South Africa's long-term economic growth rate (real GDP growth is forecast to increase to 1.2% in 2025 and average 1.8% between 2026 and 2028), which is the ultimate driver of fiscal sustainability.

The MTBPS’s positive tone is underpinned by favourable external conditions, including lower inflation, reduced bond yields, improved tax collections and South Africa’s removal from the grey list, which collectively eases debt servicing costs and expands fiscal space.

While the minister did not comment on the impact of recent U.S. trade tariffs, my view is that while they may disrupt markets in the short-term, exporters and consumers will adapt over time.

A central theme of this budget is a shift from reactive spending to strategic investment, aimed at growing the economy and reducing dependency on the state welfare system. The MTBPS presented a solid, data-backed plan that, if consistently executed, could set a foundation for medium-term stability and growth, significantly improve investor confidence, lower the country's risk premium, and ultimately prompt a positive change in South Africa's credit outlook.

Hugh Hacking is the executive head of  Structured Investments and Annuities at Momentum Corporate.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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