By Jacobus Lacock, Multi-Asset Portfolio Manager & Macro Strategist, and Sevashen Thaver, Multi-Asset Analyst 

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The South African National Budget

Finance Minister Enoch Godongwana delivered the National Budget Speech on 12 March, after it was postponed on 19 February due to disagreements within the Government of National Unity (GNU) over a proposed 2% VAT hike. The final Budget presented was not significantly different from the February version, which has sparked both positive and negative reactions.

The good – Fiscal consolidation

The Budget demonstrates the National Treasury’s commitment to fiscal consolidation and debt stabilisation. Key figures highlight a plan to stabilise debt, with debt-to-GDP ratio expected to peak at 76.2% in 2025/26. The primary budget is expected to remain in surplus and continue rising over the medium term. The budget deficit is projected to fall to 3.3% by 2027/28, down from just under 5% currently. There are no new borrowing increases to finance the increased spending, reflecting a more prudent approach to fiscal management.

 The bad – Increased revenues via taxes

To fund additional spending, the government has chosen to increase revenues through taxes. While the February proposal suggested a 2% hike in VAT, the final budget introduced a more gradual approach, with a 0.5% VAT increase to be implemented on 1 May this year, followed by another 0.5% increase next year. This will bring VAT up from 15% to 16%.

The Budget has also not adjusted tax brackets for inflation. The 0.5% VAT hike and the non-adjustment of tax brackets will likely put additional strain on consumers, who will feel the pinch in their pockets. We are not convinced that the Budget is particularly pro-growth.

What about spending?

There is a reduction in expenditure compared to the February version, particularly in frontline services like Home Affairs, social grants (although the growth remains above CPI), and contingency reserves. Spending on infrastructure has been maintained, while spending on public sector wages and the SRD grant has also remained in place. No bailout for SOEs. The Budget also allocated more funds towards SARS to improve revenue generation capabilities. While the current spending programme is broad-based and includes much-needed infrastructure and service increases, we believe there is scope to cut unproductive, wasteful spending further.

 The ugly – GNU uncertainty

The Budget now faces the challenge of approval in Parliament, where it needs to secure more than 50%. Any amendments must be made within the next three weeks. The ANC, with its 40% share, will likely struggle to secure the necessary votes without amendments or concessions. We see two possible options for moving forward:

• The ANC could seek to get opposition parties like the EFF and MK on board, replacing the VAT hike with an increase in corporate income tax (CIT) and wealth taxes. We view this as an unlikely scenario.
• ANC and the DA could agree on a path forward, with the DA accepting the 0.5% VAT increase this year but not next year or/and the ANC may need to make non-fiscal concessions to the DA or/and agree to a more aggressive spending review to cut unnecessary expenditure.

Impact on South African Reserve Bank Monetary Policy

The 0.5% VAT increase will push CPI up by 0.2% both this year and next. Therefore, average inflation will be around 4% in 2025 but potentially above 4.5% next year. This increase in inflation, combined with the ongoing uncertainty surrounding the GNU and the Budget, is likely to impact monetary policy decisions. SARB is unlikely to cut interest rates in its upcoming meeting on 20 March.

 A mixed outlook for SA assets

Overall, this is not a particularly strong pro-growth budget. The tax hikes and inflationary pressures on consumers suggest that their wallets will be squeezed, which is not great for equities. However, the continued commitment to fiscal consolidation and debt stabilisation is more positive for bondholders.

Global developments: Fading US exceptionalism

The theme of US Exceptionalism, which dominated investment strategies, is fading. The US economy and equities were strong over the last few years. Coming into 2025, earnings & economic expectations have been high, with elevated valuations and heavy investor positioning in US markets. However, recent months have shown softer economic data and increased policy uncertainty.

The surge in policy uncertainty is predominately driven by tariff threats and potential government spending cuts by the Department of Government Efficiency (DOGE). These policies have created uncertainty amongst both corporates and consumers. Corporates have become unwilling to invest, and consumers have become unwilling to consume.

This uncertainty has triggered a market correction. The S&P 500 has dropped nearly 10% since late February, and the Nasdaq is down more than 10%. The “Magnificent 7” tech stocks are nearing bear market territory, with a 16% drop from the December 2024 highs.

Source: Bloomberg, Fairtree

Meanwhile, markets outside the US have performed better, with the MSCI Emerging Markets index down 3%, the MSCI World down 7%, the MSCI China index basically flat, and the MSCI South Africa index down by 2%.

Opportunities in Europe, China, and Japan

As US Exceptionalism wanes, we see opportunities elsewhere. In Europe, the German election has led to a growing willingness to use fiscal spending to boost the economy, including a EUR500 billion infrastructure package, which amounts to 11% of Germany’s GDP. The country is also considering a reform of its debt brake, which could lead to EUR150 billion in additional defence spending. These fiscal measures could increase Germany’s GDP by 2% from its current levels by 2027.

A ceasefire between Ukraine and Russia is looking increasingly likely, which would reduce energy prices, lower inflation, and provide new investment opportunities. The European Central Bank (ECB) is expected to continue cutting rates in the short term.

In China, the National People’s Congress (NPC) has set a growth target of 5% for the year and increased the budget deficit from 3% to 4% of GDP to support domestic growth. The government is focusing on stabilising vulnerable sectors, with substantial bond issuance aimed at supporting the property sector and domestic consumption through subsidies.

In Japan, signs of reflation are growing, with the economy showing positive signs after decades of deflation.

Shifting investment trends

Investors are increasingly diversifying away from the US, moving capital to more attractive opportunities elsewhere. With the current market correction showing instability, the outlook remains uncertain. We believe we need three catalysts to address the current market correction.

First, a credible policy response. The US Federal Reserve’s policy response will be crucial, but high inflation prevents significant rate cuts soon. Tariff and DOGE spending certainty will also help, but it is unlikely over the short term.

Secondly, macro data needs to improve. US activity indicators must improve, and inflationary pressures need to ease.

Thirdly, the technical needs to improve. While valuations have improved, they remain elevated, particularly for large tech stocks. Investor positioning is still adjusting, and this process is ongoing.

Conclusion: More downside potential

Given the current economic uncertainties and market conditions, there is still potential for further downside in the markets. The US has lost some of its exceptionalism while other global markets show more promise. For South African investors, the mixed budget and the broader global trends will continue to create challenges and opportunities.

 

Disclaimer: 

Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com.