By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Minister of Finance, Enoch Godongwana, is set to deliver the national budget for the third time this year - an anomaly in South Africa's democratic history but one which may become a feature of the coalition government. This follows two previous budget statements being set aside, first through political opposition and then via a Western Cape High Court ruling1 that suspended the proposed VAT increase, which was spearheaded by the Democratic Alliance and the Economic Freedom Fighters.
The original February budget proposed a 2 percentage point (ppt) VAT increase from 15% to 17%. The revised March budget introduced a phased approach: a 0.5ppt increase to take effect on 1 May 2025, followed by another 0.5ppt increase on 1 April 2026, raising the VAT rate to 16%.
Budget and economic challenges
Scrapping the proposed VAT hikes has left government with limited fiscal options. It now faces the challenge of identifying alternative revenue sources or significantly reducing and reprioritising expenditure. Against a challenging economic backdrop, achieving stronger revenue growth will be increasingly complex.
Since the start of the year, the global environment has been marked by heightened uncertainty around trade and economic policy, primarily driven by United States (US) tariffs and escalating trade tensions. As a result, both global and domestic growth forecasts have been revised down from the assumptions that would have underpinned the first two budgets tabled on 19 February and 12 March.
The International Monetary Fund (IMF) has lowered its global growth projections to 2.8% for 2025 and 3.0% for 2026 from 3.3% previously. Our forecast for South Africa's real GDP growth has been revised to 1.3% in 2025 and 1.6% in 2026, from 1.9% at the start of the year. These weaker growth projections, coupled with the VAT freeze, point to a likelihood of a sizeable tax revenue shortfall.
Spending and potential adjustments
In the previous budget statements, government earmarked R46.7 billion for infrastructure investment over the 2025 Medium-Term Expenditure Framework (MTEF); R23.4 billion for the 2025 public-service wage agreement and its carry-through costs; R11 billion for early retirement costs; and R35.2 billion for the Covid-19 Social Relief of Distress Grant (SRD). While adjusting allocations related to the public-service wage agreement and SRD grant will be difficult as the continuation of the SRD grant is another recent outcome of judicial rulings, there may be some flexibility to scale back early retirement costs. Infrastructure investment could also be scaled down, but without escalated attraction of private sector savings, such spending reprioritisation would be concerning.
¹ However, the ruling by the court came after the minister had already withdrawn the fiscal framework.
Other spending allocations included R23.3 billion for an above-inflation increase in social grants, as announced in the 19 February budget. This was later revised down to R8.2 billion in the 12 March budget. Similarly, provisional allocations for frontline services were reduced from R75.6 billion to R70.7 billion between the two budgets. To offset a potential revenue gap, these allocations could face further reductions.
Broader implications
In the face of these challenges, government must still demonstrate a credible path towards fiscal consolidation. However, there is a growing risk that the primary surplus, government's key anchor for stabilising debt, will be under significant pressure. As a result, public debt may peak at a higher level than the 76.2% of GDP projected for 2025/26 in the 12 March budget. Our current baseline view incorporates these risks and is reflected in our sovereign rating outlook, which suggests that an upgrade by S&P Global of South Africa's local and foreign currency ratings to BB and BB+ may be delayed until next year.
Week in review
The Quarterly Labour Force Survey (QLFS), a household-based employment survey (not seasonally adjusted), reflected a decrease of 290 575 q/q in total employment during 1Q25, following an increase of 131 669 q/q in the previous quarter. However, compared to the same quarter last year, employment improved by 42 517 to 16 787 267. The level of unemployment increased by 236 731 q/q (1 789 y/y), bringing the total number of unemployed individuals to 8 227 678. As a result, the official unemployment rate increased by 1.0ppt to 32.9%. The absorption rate decreased by 0.8ppts to 40.3%, suggesting a moderate deterioration in the economy's ability to create jobs. At this rate, a significant proportion of the working-age population is still left out of the economy, emphasising the need for faster and labour-intensive growth. The near-term cyclical outlook for the labour market is clouded by elevated global uncertainty, including the impact of US trade tariffs. However, continued structural reforms should, over the medium term, support employment creation.
Mining production (not seasonally adjusted) declined again in March by 2.8% y/y after falling by 9.7% y/y (previously -9.6%) in February. This marked five successive months of annual decline. Seasonally adjusted mining output expanded by 3.5% m/m, reflecting a rebound from a 4.1% monthly decline, better than the previously recorded fall of 4.4%. Still, the data confirms that the mining sector dragged GDP growth during the first three months of 2025, with output having contracted by 4.5% q/q, worse than the 0.7% contraction recorded in 4Q24. This, together with the quarterly weakness recorded in the manufacturing and electricity sectors, poses a downside risk to the 1Q25 GDP growth estimate. The remaining high-frequency data to be published over the next two weeks will give a clearer picture of how the economy performed in 1Q25. At this stage, we pencil in 0.2% quarterly GDP growth for 1Q25, which is lower than the 0.6% quarterly growth recorded in 4Q24.
Week ahead
On Wednesday, data on consumer inflation for April will be published. Headline inflation was 2.7% y/y in March, down from 3.2% in February. Monthly pressure was 0.4%, led by contributions from core inflation. Inflation should remain steady in April before resuming a rising trend in May - we see the April headline number at 2.7%. Some monthly pressure could show up in food inflation, while fuel price declines continue to contain overall inflationary pressure. The favourable base effects that have kept headline inflation around the bottom of the inflation target range should start to fade at around the turn of the year. However, the weak starting point and softer oil prices should support inflation below the midpoint of the inflation target range in 2H25, averaging around 3.5% this year.
Also on Wednesday, retail sales data for March will be released. In February, year-on-year sales growth remained solid at 3.9%, though this marked a slowdown from January's 7.0% increase. However, on a month-on-month basis, sales declined by 1.3%, reversing the 0.7% gain recorded in the previous month. This suggests that the recent surge in shopping activity is losing steam, raising concerns that the retail sector could weigh on GDP growth in 1Q25.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 13 May | SA | Official unemployment rate % | 1Q25 | 32.9 | 31.9 |
| 15 May | SA | Mining production % y/y | Mar | -2.8 | -9.7 |
| SA | Mining production % m/m | Mar | 3.5 | -4.1 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 21 May | SA | CPI % y/y | Apr | 2.6 | 2.7 |
| SA | CPI % m/m | Apr | 0.1 | 0.4 | |
| SA | Retail sales % y/y | Mar | -- | 3.9 | |
| SA | Retail sales % m/m | Mar | -- | -1.3 | |
| SA | National Budget Speech | -- | -- | -- |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 92,338.44 | 1.60% | 3.10% | 16.40% |
| USD/ZAR | 18.02 | -1.00% | -5.40% | -1.40% |
| EUR/ZAR | 20.16 | -1.40% | -6.10% | 1.30% |
| GBP/ZAR | 23.98 | -0.50% | -4.80% | 3.50% |
| Platinum US$/oz. | 994.2 | 1.00% | 3.30% | -6.90% |
| Gold US$/oz. | 3,240.10 | -2.00% | 0.30% | 35.80% |
| Brent US$/oz. | 64.53 | 2.70% | -0.20% | -22.00% |
| SA 10 year bond yield | 9.66 | 0.10% | -4.30% | -14.20% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.6 | 1.3 | 1.6 | 2.0 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.1 | 2.0 | 2.1 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.7 | 1.3 | 2.6 | 3.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 3.5 | 4.3 | 4.4 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 4.3 | 4.2 | 4.4 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.5 | 18.3 | 18.6 | 18.6 | 19.1 |
