Macro Pulse Episode 25

Hello and welcome to Macro Pulse. Now the most important event this week was the announcement of the medium term Budget Policy Statement by Finance Minister Enoch Godongwana, as you remember earlier in the year, the 2025 national budget was delayed from February to May as the new partners clashed about the 2% VAT hike that was proposed. So there was some confidence that was impaired that needs to be restored with this budget, and we believe this budget was delivered to successful and did restore some of that confidence.

When we look at some of the highlights of this budget. And what we liked was, first of all, the fact that there’s still a commitment towards fiscal consolidation, the debt to GDP number is still expected to peak this year at 77.9%, which is only marginally higher than the 77.4% that was projected in May earlier this year. And this stabilization of the debt GDP ratio is in part because of the primary budget surplus which we are running, and that budget surplus is expected to be 0.9% this year and then increased to 2.5% in the next three years.

Now, a positive primary budget surplus means that our revenues more than cover our government spending. When you exclude debt servicing costs. The second positive was the fact that we see policy alignment not only between the junior partners that have expressed support for this budget, but also the fact that National Treasury has now adopted, officially adopted the 3% inflation target with a +-1% band around it.

This means that National Treasury and the SARB both are agreeing on economic policy and provide policy credibility to them. Then thirdly, we think the economic reforms and signs of ongoing economic reforms is also evident from this budget. Not only is the inflation target the lower inflation target, one of the key economic reforms that we have seen in the country for the last few decades, although that suggested that show that revenues will be lower over the next few years as a result of a lower nominal GDP.

But that is more than offset by the gains from lower spending, lower borrowing costs and also lower cost of living benefits that then comes to, to the consumer. So we believe that with the lower inflation target, that economic reform, together with the fact that if you look at the budget, the spending and some of the gains that we’ve received has been tilted towards spending in infrastructure, infrastructure spending is definitely accelerating faster than some of the other components.

And we are encouraged by the fact that this infrastructure bond that will be issued by National Treasury and mechanisms are being put in place for the private sector to play a bigger role in investing in the network economy. There’s also been discussions around, consolidating the wage bill, commitment towards still a fiscal anchor and some procurement reforms, which we believe is important for the future.

What are some of the other highlights that we that we saw from this budget? Well, first of all, on the revenue side, we saw that for this fiscal year, revenues was revised up by about 20 billion. That is mostly as a result of, corporate income taxes as well as VAT taxes. Also SARS efficiency. So the revenue service finding it, more efficient to, to take in revenues and tax revenues.

And then looking forward, we see that, on the revenue side, the projections is still fairly conservative. So we think that, for instance, corporate income taxes could surprise to the upside relative to the national Treasury’s estimations, as we haven’t yet seen the full impact of the increase in commodity prices and thereby the impact that has on the mining sector come through in, in corporate income taxes.

So that is something that will play out over the next few years. So we believe that there’s still some potential, revenue upside on the spending side. As I said earlier, more, more, priority or bigger priority towards infrastructure spending. Although education and health care also received, more money. So when it comes to the budget deficit, the deficit for this year is expected to be 4.5%, slightly lower than the 4.6% that was projected in in May this year.

But with this lower budget deficit, cash buffers, that is quite strong and also funding progress. The national changes also announced that debt issuance of nominal debt will reduce by 750 million per week, which means that the government effectively project to the issue listed and a lower borrowing requirement. Ultimately, some of this borrowing requirement is also being supported by the fact that there’s a decision to again draw money from the federal account, the gold in foreign exchange, contingency reserve account, to the extent of about 31 billion.

That will also help to destabilize overall the data GDP ratio. So overall, the market reacted quite positively, positively to this budget. We saw that bond yields in the ten year bond yield, dropped about 13 basis points. With bond yields at the lower end of the yield curve, falling further. We also saw that the equity market, the local equity market was up, 1.5% with SA Inc specifically banks and retailers performing very well. And the rand is also strengthened by the tune of about 0.5%.

Next, we will be looking at the S&P Global Credit Ratings review. That review is due this weekend on Friday. A year ago S&P has put a date on a positive outlook, which means that they may now decide to increase or, up our overall credit rating. We believe that the budget announcement and what has been announced within the budget does give credit agencies, the ammunition to potentially, you know, improve our credit ratings over the next few quarters and a couple of years.

Then next week, we also have the SARB meeting. Now let’s check in. And he would feel very confident in that. National Treasury has now back that and with inflation still low the rand stronger, the oil price lower. The US potentially still cutting interest rates at the 10th of December and economic growth in South Africa. So on the soft side, we believe that the SOP could, cut rates at the meeting now on the 20th of November.

Looking forward, the market still sees limited cuts by the SARB over the next couple of years. And we think that relative to this market expectations, there is more scope for the SOP to potentially cut interest rates.

Then we also had some interesting, labor numbers at this week with the quarterly Labor Force Survey showing that the unemployment rate in South Africa has dropped from, 33.2% to 31.9%, with about 248,000 jobs being created, mostly in the Western Cape, KZN and Gauteng and in particularly in the trade sector, the construction sector, as well as services.

While manufacturing and the financial sector has lost some jobs overall. When we look at the economic reforms and some of the better economic data that’s coming out and improved sentiment amongst foreign investors, and the fact that we’re not doing that badly on the sports fields either. We do think that 2026 is setting up to be an interesting year for local markets.

That’s all for this week. Thank you.