The tide is turning for South Africa
There are now clear signs that the tide is turning for the better for South Africa’s economic situation.
This is according to Stanlib Asset Management chief economist Kevin Lings, who said that there are several recent developments that point to a more stable and improving outlook after years of weak growth and heavy fiscal pressure.
He explained that, in general, South Africa’s economic outlook has become slightly more optimistic in recent months.
Lings based much of this view on the Medium-Term Budget Policy Statement (MTBPS), which showed stronger revenue, better spending control, and steady progress in fixing the public finances.
He highlighted stronger-than-expected tax revenue as a key turning point. “Tax revenue collection exceeded budget by R19.7 billion,” he said.
VAT and corporate taxes did particularly well, offsetting weaker personal income tax. He added that Treasury has not yet fully factored in the effects of higher platinum and gold prices, meaning corporate tax collections could outperform again next year.
For him, this overrun is an encouraging sign that SARS is improving compliance and collection systems.
Better revenue has been matched by better expenditure control. Even though the government added R15 billion in new spending, Lings described this as “very manageable.”
With unemployment still high and infrastructure under strain, he said it is significant that Treasury is keeping key departments within budget and showing restraint rather than allowing spending to escalate.
He also pointed to the continuation of a primary budget surplus, which he believes is an underrated development.
A primary surplus means that government revenue exceeds spending before interest costs are included.
“I don’t think this gets enough attention,” Lings said, noting that it reflects an underlying discipline that credit rating agencies consider important.
This contributes to broader fiscal consolidation, which shows Treasury is committed to improving the debt outlook despite low growth and lower inflation.
Another positive, according to Lings, is the government’s decision to reduce its borrowing requirement.
“Government’s taken the opportunity to reduce the borrowing requirement, and that sends a very powerful message,” he said.
Lower borrowing has already helped strengthen the bond market and should lead to cheaper government financing in the future.
Economic growth is the key
Lings added that the R31 billion transfer from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) is also supportive, as Treasury is using it to reduce debt.
While some debate the use of the account, he noted that the Reserve Bank is following established rules and international standards.
He also welcomed Treasury’s endorsement of a new inflation target of 3%, with a 1-percentage-point margin, adding that it improves alignment between Treasury and the Reserve Bank and boosts policy credibility.
With inflation already averaging just above 3%, Lings believes the target could be reached by 2027.
These developments together “are very powerful,” he said, arguing that they have helped strengthen the rand, support the bond and equity markets, and are the reason for the country’s credit rating upgrade.
South Africa’s weak growth remains the main drawback, but Lings believes the fiscal improvements are meaningful. “Overall, I think this was a good outcome,” he said.
Shortly after the MTBPS, Standard & Poor’s (S&P) revised South Africa’s credit rating from BB- to BB and kept the outlook positive.
Lings sees this as an important vote of confidence. “More importantly than that, they kept the outlook on a positive rating,” he said, which signals that S&P believes the country could receive another upgrade if progress continues.
Lings said S&P based its decision on stronger tax revenue, a primary budget surplus, improved spending discipline, and better prospects for state-owned enterprises.
S&P believes the risks from Eskom and Transnet have peaked, helped by Eskom’s first profit in eight years and stricter government oversight.
However, low growth remains the country’s biggest challenge. South Africa’s growth rate remains at around 1%, with S&P forecasting a rate of around 1.5% over the next three years.
This will not be enough to significantly reduce unemployment or inequality. However, S&P sees growth potential if improvements in logistics gather momentum.
The positive outlook is what Lings considers most important. It implies that S&P believes South Africa will maintain fiscal discipline and continue with reforms.
The rating upgrade has already boosted the bond market, helped by contained inflation and strong foreign buying in recent months.
Lings expects the rand to remain stable, saying most of the good news is now priced in. However, he stressed that South Africa now needs to convert fiscal progress into stronger economic growth.
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