Thursday’s medium-term budget policy statement offered an encouraging view of the future and has highlighted the government’s ambitious long-term plans for a sustainable way forward.
However, unsustainably high and escalating public debt levels and anaemic growth still bedevil the country. So the nation and investors were keen to hear from finance minister Enoch Godongwana what the government’s plans were for extricating South Africa from this quagmire.
So much has changed in the political and economic landscape during the course of this year. The country has been removed from the Financial Action Task Force grey list, while the rand has strengthened.
Politically the government of national unity has become more cohesive, with partners having recently recommitted themselves to working together. This alone has been a very strong sign that political leaders across the spectrum are committed to making progress.
It was amid all this that the minister delivered his updated plans, with the fracas that surrounded the final passing of the national budget in May 2025 still lingering in the minds of many. This meant that this budget statement was always going to attract interest from South Africans and investors alike.
Inflation was a key issue that was expected to be addressed. There had been rising tension between the minister and the central bank, which had been a growing source of concern, and financial markets were keen to hear his views.
It would seem the minister, in principle, was not against lowering the inflation target but maintained that fiscal policy was his prerogative while the central bank’s role was implementation.
At its meeting in July, the South African Reserve Bank announced that, with immediate effect, it would anchor its long-term inflation expectation at 3.0%. In doing so, the Bank had not violated its inflation-targeting mandate; however, the announcement raised the ire of the minister, who may have felt that the central bank was encroaching on his jurisdiction.
It would seem the minister, in principle, was not against lowering the inflation target but maintained that fiscal policy was his prerogative while the central bank’s role was implementation.
Godongwana surprised everyone by confirming congruence between the government and the central bank on the need to lower the inflation target and by lowering the target to 3% with a one-percentage-point band.
The lower inflation target is effective immediately and replaces the old 3%–6% target band. This new target will be implemented over the next two years, with both the National Treasury and the central bank guiding inflation expectations to the lower target.
The speech made it clear that the introduction of private investment and competition in the energy and logistics sectors, as outlined in Operation Vulindlela, is advancing at a faster pace. At the same time, delays in the restructuring of Eskom and Transnet remain a concern, necessitating an updated assessment of progress on these critical reforms.
Meanwhile progress in establishing the National Water Resources Infrastructure Agency is well advanced. In parallel, broader infrastructure reforms will leverage public funds to unlock additional private investment and improve the quality of spending. Public entities will also play a role in supporting these infrastructure developments, reinforcing the drive towards sustainable growth.
The speech appeared to represent a turning point from a policy point of view. It was ultimately a pragmatic and realistic statement aimed at steering South Africa towards a fiscally stable future.
Among the important takeaways, lower inflation targets and infrastructure investment should support long-term fiscal stability and economic growth. At the same time delays in Eskom and Transnet restructuring continue to keep some investors cautious; however the minister demonstrated a willingness to explore approaches to these complex challenges.
Equally significant, the proposed 3% inflation target is likely to improve real disposable incomes, thereby increasing real household spending and private investment.
In reaction to the speech the markets responded positively. Investor sentiment was upbeat, with strong endorsement reflected in a further rally in domestic bonds and the rand.
Most importantly ordinary South Africans were in general encouraged by this budget statement, and their hopes for a sustainable future were meaningfully reignited.
• Mabece is head of South African fixed income at Melville Douglas
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