What the budget means for business and the rand

The Medium-Term Budget Policy Statement delivered several wins for South Africa: debt is expected to stop rising next year, revenue came in stronger than Treasury anticipated, and more funding is finally being directed towards long-term infrastructure – the area the government has identified as the main driver of future growth.

As important as these developments are, the decision to lower the inflation target to 3% is the one that matters most because it is the change that will influence the country’s economic direction for years to come.

A lower target sends a message to investors, businesses and households that the government is serious about keeping price increases in check. It also guides how interest-rate decisions are made and affects the cost of borrowing across the economy.

South Africa hasn’t revised its target in 25 years; adjusting it now is long overdue and reflects a push to bring some predictability back into the system.

The impact won’t be immediate. Households will feel the effects gradually, but when inflation is kept in check, everyday costs don’t climb as fast. That gives families a bit more room to plan, especially when wages haven’t kept up with rising living expenses. It also creates space for a softer interest-rate cycle over time, which eases the pressure on mortgages, credit and other household debt.

For businesses interest rates feed directly into cash flow. High inflation keeps borrowing expensive, which limits investment and delays hiring. A credible commitment to a lower target increases the likelihood of a cheaper long-term cost of capital, which gives businesses more room to invest in equipment, expand operations or enter new markets without the same level of financing pressure.

Investors will read the new target as a positive sign, positioning South Africa as a more reliable investment destination. Markets had anticipated this move for a while now; confirming it gives them a clearer sense of where the country’s policy is heading.

The Budget does recognise the near-term difficulty. Lower inflation means lower nominal GDP, which reduces tax revenue. That makes fiscal consolidation harder in the short run. But if South Africa can lock in lower long-term borrowing costs, already visible in falling bond yields, it takes pressure off the state’s interest bill, which absorbs about 22c of every rand of revenue. Any relief on that front matters, because it frees up money that can be used far more productively elsewhere.

The broader fiscal picture is also more encouraging. Debt is expected to stabilise at 77.9% of GDP in 2025/26 – the first time since 2008 that South Africa prevents the ratio from rising. The R19-billion revenue overrun strengthens this position. One strong year does not guarantee a trend, but the combination of firmer revenue, controlled spending and clearer policy direction is something ratings agencies will pay attention to.

Infrastructure investment is the second major theme. The government is redirecting funds towards transmission lines, logistics corridors, water systems and port improvements, which will not solve immediate bottlenecks, but they matter for future productivity and the ability of businesses to move goods, trade and grow. For businesses dependent on cross-border trade, more reliable logistics and power supply have direct commercial benefits.

This environment intersects with the realities facing many businesses. Companies with international exposure need steady conditions: manageable inflation, a clearer interest-rate outlook and a rand that is less prone to large swings. A lower inflation target helps create that environment by reducing the likelihood of abrupt policy moves.

Even with improved signals, the FX landscape remains complex. SMEs seldom have the capacity to track global market movements, compare spreads or optimise international payments. Outsourcing treasury functions allows firms to focus on operations while ensuring that their currency exposure and transactions are handled efficiently. In a calmer macro environment, well-managed execution becomes an advantage rather than a technical detail.

The new target will not resolve South Africa’s structural challenges on its own. Growth remains subdued, unemployment is high, and the problems in energy and logistics need sustained attention. But this Budget presents a more coherent policy framework than we have seen in some time. Lower inflation, stabilising debt and a move towards investment-led spending provide a firmer base for the years ahead.

For households, the prospect is steadier living costs. For businesses, it is an environment more conducive to investment and planning. For investors, it shows intent and discipline.

The lower inflation target is the nugget in the Budget that really matters. It gives policy a clearer direction. If the government sticks to it, it could go a long way toward rebuilding credibility with investors, ratings agencies and the markets that assess South Africa’s risk.

Harry Scherzer, co-founder and CEO of Future Forex.

BUSINESS REPORT