South Africa’s (SA) 2026 Medium-Term Budget Policy Statement (MTBPS), due to be tabled on Wednesday, 21 October, comes against a significantly more challenging global backdrop than that which informed February’s Budget. The escalation of the conflict in the Middle East has triggered a renewed energy shock, raised inflationary pressures and weakened the global growth outlook. The International Monetary Fund (IMF) now expects oil prices to average around US$96/bbl in 2026, approximately 41% higher than in 2025. Global growth is projected to slow to 3.1% from 3.5% in 2025 before recovering modestly to 3.4% in 2027. Meanwhile, global headline inflation is forecast to rise to 4.7% in 2026 before easing to 4.1% in 2027, largely driven by higher energy and food prices.
A prolonged conflict or further escalation in the Middle East could keep oil and food prices elevated, putting additional pressure on inflation, fiscal and external balances, and global economic activity. Emerging markets (EMs) are particularly vulnerable. The IMF expects EM growth to slow to 3.7% in 2026 from 4.5% in 2025, while heightened risk aversion could trigger portfolio outflows and currency depreciation. These developments would amplify imported inflation and tighten financial conditions, further constraining growth. SA is especially exposed because of its reliance on imported oil, a fiscal framework that has already absorbed temporary fuel levy relief, and a monetary policy outlook that has shifted from easing towards further tightening.
The domestic economy is already showing signs of strain. Real GDP contracted by 0.2% QoQ in 2Q26, marking the first quarterly decline since 3Q24 and ending a run of six consecutive quarters of expansion. Annual growth slowed to 0.9% YoY from 1.9% in 1Q26. Although several sectors continued to expand, declines in mining, manufacturing, and trade-related industries were sufficient to drag overall growth into negative territory. On the expenditure side, stronger import growth and subdued fixed investment further weighed on activity.
Higher oil prices are likely to compound these pressures by increasing transport, logistics, and production costs, squeezing profit margins and eroding household purchasing power. If these pressures persist, businesses may scale back investment and hiring, while households face further pressure on disposable incomes. Together with weaker global growth and tighter domestic monetary policy, this points to a more challenging outlook for the remainder of 2026 and early 2027.
Inflation dynamics have also become less favourable. August headline inflation, as measured by the consumer price index (CPI), edged higher to 4.4% YoY from 4.3% in July, while core inflation remained elevated, reflecting persistent underlying price pressures, particularly in services. The sharp increase in global oil prices is expected to feed through to domestic fuel costs and broader consumer prices.
In response to the changing outlook, the South African Reserve Bank (SARB) raised the repo rate by a further 25 bps to 7.25% in September, its second consecutive increase in the current tightening cycle. The SARB’s latest projections indicate that inflation will rise materially over the coming quarters as fuel prices surge, before moderating in 2027 as the direct effects of the oil shock fade and favourable base effects emerge. Higher borrowing costs, alongside weaker real incomes, are likely to weigh on economic activity.
Despite the deteriorating macroeconomic environment, fiscal performance has remained relatively encouraging. August’s fiscal data confirmed that the public finances are tracking ahead of the assumptions underpinning the February Budget. The monthly deficit of R29bn was the narrowest August shortfall recorded in eight years, as revenue growth continued to outpace expenditure growth. More importantly from a debt sustainability perspective, the primary balance continued to strengthen, with the primary surplus reaching c. 1.4% of GDP.
Revenue performance has been broad-based, but the sustainability of the gains varies across tax categories. Corporate income tax remains the primary driver of outperformance, increasing by 18.5% YoY in August and by more than 20% YTD. The lagged nature of provisional tax payments means some support should extend into FY27/FY28.
Personal income tax (PIT) collections have also exceeded expectations, partly due to lower-than-expected refund payments. However, this strength sits uneasily alongside softer earnings growth and a weakening labour market. Although recent labour market deterioration appears to reflect increased labour force participation rather than widespread job losses, slowing income growth suggests that PIT collections may struggle to sustain their current pace, particularly if refund payments normalise.
Value-added tax (VAT) collections have likewise surprised positively. Domestic VAT receipts rose by around 8% YTD, compared with the Budget assumption of 4.5%, while slower-than-expected growth in VAT refunds has supported net collections. However, import VAT remained subdued, reflecting weak import demand and domestic activity.
The fuel levy remains the principal source of revenue weakness. Collections were c. 15% lower YoY in August and substantially below Budget expectations on a YTD basis, reflecting the government’s fuel levy relief measures and weaker fuel demand. Dividends tax and tax debt collections have also underperformed, although these shortfalls have not materially offset the broader revenue strength.
Expenditure pressures are emerging primarily at a provincial and national government level rather than from debt-service costs. Total expenditure increased by 5.0% YoY in August, with spending growth at both levels running ahead of Budget assumptions. Provincial expenditure growth has been particularly strong, reflecting ongoing spending pressures in key service-delivery sectors.
By contrast, debt-service costs have increased more slowly than anticipated, providing some near-term fiscal relief. However, this remains a potential vulnerability: persistent global risk aversion and domestic interest rates staying higher for longer could increase borrowing costs and place further pressure on the public finances.
The MTBPS is likely to present a mixed picture. Fiscal outcomes have thus far exceeded expectations, providing some support for Treasury’s debt-stabilisation strategy. However, much of the revenue outperformance appears cyclical rather than structural, while expenditure pressures are building. At the same time, weaker domestic growth, higher inflation, and tighter monetary policy have made the macroeconomic outlook less favourable than in February.
Treasury is thus likely to lower its growth forecasts, acknowledge the increased inflation risks, and adopt a more cautious assessment of the fiscal outlook. The challenge will be to accommodate the economic consequences of the energy shock without undermining progress towards debt stabilisation or compromising the credibility of the fiscal framework.
The 2026 MTBPS provides an opportunity for Treasury to reinforce fiscal credibility while maintaining a focus on growth-enhancing reforms. Against a more difficult global and domestic backdrop, the following priorities form our wish list for this year’s statement.
- Update macroeconomic and fiscal assumptions to reflect current conditions. The MTBPS should revise growth, inflation and interest-rate forecasts to account for the energy shock, weaker global growth prospects and the SARB’s recent policy tightening. Treasury should also quantify the implications for debt-service costs. In addition, it should distinguish clearly between improvements in debt and deficit ratios resulting from the rebasing of GDP and those reflecting genuine fiscal consolidation.
- Provide greater detail on the proposed fiscal anchor. Following progress on the draft fiscal-anchor legislation, the MTBPS should set out the principles underpinning the framework and explain whether these translate into measurable debt or expenditure targets. It should also clarify reporting and enforcement mechanisms, define the circumstances in which escape clauses may be invoked, and provide a clear timeline for tabling the legislation before Parliament. Greater clarity is essential if investors are to assess the framework’s credibility and its ability to support fiscal discipline over time.
- Ensure that any successor to the Social Relief of Distress (SRD) grant is targeted and sustainably funded. With the SRD grant due to expire in March 2027, any replacement, including a proposed livelihoods grant or broader income-support mechanism, should be fully costed and supported by identified funding sources. Where possible, assistance should be linked to employment, training and skills-development programmes to encourage labour market participation. Any new commitment should be designed to avoid creating a permanent, unfunded expenditure burden.
- Maintain fiscal discipline in responding to the energy shock. Measures to cushion households and businesses against higher fuel and living costs should be temporary, targeted and fully funded. Temporary supply shocks should not lead to permanent increases in expenditure or weaken the fiscal position. This is particularly important while debt-service costs remain elevated and fiscal space is limited.
- Improve transparency around contingent liabilities and state-owned entities (SOEs). Investors need updated assessments of the fiscal risks associated with entities such as Transnet, SANRAL, Denel, the Land Bank and the Road Accident Fund.
- Accelerate structural reforms that improve the ease of doing business. Further progress under Operation Vulindlela should remain a priority, particularly in rail reform, electricity market liberalisation, regulatory efficiency and visa reform.
- Clarify the affordability and funding of National Health Insurance (NHI). Given ongoing legal and implementation uncertainty, the MTBPS should set out realistic implementation scenarios, credible cost estimates and potential funding mechanisms for the NHI.
- Protect infrastructure investment within the expenditure envelope. SA’s investment rate remains well below the level required to lift potential growth meaningfully, while investment in transport, logistics, energy and water infrastructure remains insufficient. Over time, the composition of spending should shift towards investment that expands the economy’s productive capacity, rather than allowing consumption expenditure to crowd it out.
- Ensure fiscal and monetary policy supports the inflation objective. With inflation expected to rise temporarily above target because of the fuel shock, the Treasury should reaffirm its commitment to a policy framework consistent with medium-term price stability. Fiscal decisions, including administered price adjustments and public-sector wage agreements, should support rather than undermine the SARB’s efforts to anchor inflation expectations and return inflation sustainably toward the 3% objective.
Taken together, our wish list can be summarised as follows: The MTBPS should use the current revenue outperformance to strengthen the public finances rather than create room for unfunded spending commitments. It should also improve transparency around fiscal risks, accelerate structural reforms that raise potential growth, and ensure that any new expenditure commitments are fully funded and fiscally sustainable. In a more adverse global environment, policy credibility will be one of SA’s most valuable economic assets.
