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2025q4

Regional eXplorer (ReX) update – 4th quarter of 2025

S&P Global is glad to announce the fourth quarter update for 2025 of Region al eXplorer (ReX) – the South African knowledge base of municipal-level insight. Each quarter, data from a vast number of sources are incorporated into the ReX database to provide users with the most up-to-date statistics.

In this newsletter:

1. Favourable growth momentum is expected to spill over to the third quarter of 2025, but at a slower pace

2. Medium-and long-term outlook

3. Risk to the forecast

4. Main data release

Favourable growth momentum is expected to spill over to the third quarter of 2025, but at a slower pace.

S&P Global Market Intelligence has raised South Africa’s 2025 real GDP growth forecast to 1.2% from 1%. A 0.8% quarter-over-quarter recovery in the second quarter exceeded expectations, primarily driven by household spending, which contributed 0.6 percentage point to growth. Additionally, inventory accumulation and positive government spending bolstered growth momentum.

Preliminary indicators suggest that the growth momentum will continue during the third quarter of 2025, although at a slower pace. Growth is expected to find support from sustained robust household spending. Exports could lose some momentum as global trade starts to taper. The slowdown in US exports, following the introduction of a 30% tariff on all South African exports to the US on August 8 and the suspension of the African Growth and Opportunity Act (AGOA) at the end of September, will be partly offset by strong expansion in South African exports to Europe and an improvement in South Africa’s terms of trade during the third quarter of 2025, as the latest numbers from the South African Revenue Service (SARS) indicate.

Nominal disposable income levels are anticipated to experience slower growth than earlier projections due to rising fuel levies and an increased tax burden. The 2025–26 national budget made no inflationary adjustment to tax brackets and rebates or medical tax credits. The downward pressure on spending from higher taxes may be offset by lower inflation and the introduction of the new two-pot retirement system, allowing households to access a portion of their pension savings in 2025.

Preliminary estimates show that pension fund withdrawals accelerated to an average of 42.9 billion rand ($2.4 billion) per quarter in 2024 from an average of 37.6 billion rand per quarter in 2023. The increase in household consumption expenditure was relative muted, according to the South African Reserve Bank (SARB), as proceeds were also used to repay household debt and acquire household assets. Overall, Market Intelligence expects this trend to continue in 2025 and add 0.1-0.2 percentage point to the 2025 real GDP growth rate.

Real fixed investment spending is expected to fall by 2.3% in 2025. Sticking high interest rates, combined with mounting business and investor uncertainty amid rising global and domestic volatility, are likely to delay private sector investment in 2025. Policy reforms in South Africa’s energy, water, ports and railway sectors will continue nonetheless, with a strong focus on public-private partnerships underscoring future investment in public sector infrastructure.

Furthermore, during 2026 there is room for further monetary easing. SARB lowered its policy rate by 25 basis points to 6.75% during the November Monetary Policy Committee meeting. SARB’s current estimates show that the headline inflation rate will trail toward the 3% inflation target during the fourth quarter of 2026. Headline inflation will edge up to an average of 3.8% during the first half of 2026, SARB reported. The current inflation outlook leaves room for further monetary easing of 75 basis points in 2026, in Market Intelligence’s view, but more toward the second half of 2026. While it is assumed that there will be Rand stability in 2026 with the Rand exchange rate strengthening against the US dollar during the fourth quarter of 2025. Reflecting improved market sentiment following South Africa’s exit from the Financial Action Task Force grey list, an upgrade of the sovereign rating by S&P Global Ratings, which maintained a positive outlook and strong fiscal performance. A wide inflation and interest rate differential combined with a relatively stable dollar will support the rand in 2026, which is expected to average 17.10 to the US dollar.

The 2025 midyear budget shows revenue gains and lower debt costs to sustain fiscal year 2025–26 targets. South Africa’s budget deficit for fiscal year 2025–26 is now projected at 4.5% of GDP, down from 4.8%, with government revenue exceeding estimates by 19.3 billion rand ($1.1 billion). Strong household spending boosted value added tax, and corporate tax receipts also performed above expectation. The government proposes an additional 15.8 billion rand in expenditures, focusing spending on investment, leading to 7.5% growth in capital payments over the medium term. The inflation target has officially changed to 3% with a 1% tolerance band, replacing the previous 3%-to-6% range, contributing to lower government bond yields and significant debt servicing savings.

Medium-and long-term outlook

S&P Global Market Intelligence raises South Africa’s medium- to long-term potential growth estimate to 3%-3.5%.The downward revision of South Africa’s inflation target to 3%, from the previous range of 3% to 6%, underlines the upward revision in potential growth. While this new target will initially lead to lower near-term nominal GDP estimates and, consequently, reduced government revenue projections, less-favourable debt-to-GDP ratios and a wider current account deficit, the benefits of a lower inflation environment will outweigh these effects. Lower nominal government revenue will be offset by reduced debt servicing costs as nominal bond yields decline. A binding fiscal anchor, such as a stabilizing primary budget surplus, is likely to emerge in the short to medium term to promote fiscal consolidation and reduce the risk of fiscal imbalances and public-sector debt instability. Fiscal consolidation amid reduced government spending and debt servicing pressures will become more feasible, allowing for the widening of the domestic savings pool, which will support faster capital formation in the economy. Lower inflation will contribute to overall lower interest rates, with the policy rate expected to settle near 5.5% over the medium to long term, thereby supporting household spending.

Policy reforms are furthermore likely to support the upward revision in South Africa’s real potential growth rate over the long term. The formation of the Government of National Unity (GNU) after the May 2024 elections is set to advance policy reforms in South Africa’s energy, ports and railway sectors while addressing critical skills shortages through visa reforms. Increased private-sector involvement in renewable energy, port operations and railway access is expected to enhance gross capital formation via more efficient and productive infrastructure development. South Africa furthermore stands out in sub-Saharan Africa for its favourable demographic dividend, with a larger working-age population compared to non-working individuals supporting potential growth over the long term. Businesses are furthermore likely to expand operations beyond infrastructure development to leverage preferential access under the African Continental Free Trade Agreement (AfCFTA), investing in critical mineral deposits, the tourism sector, and advanced financial and technology services.

Low savings, albeit higher than before, will leave South Africa reliant on foreign direct investment (FDI) to achieve growth objectives. The relatively low savings rate will result in South Africa depending on FDI, necessitating the maintenance of regional competitiveness to attract capital into the country. Investors can take confidence in South Africa’s favourable business environment. The country has a highly developed and well-regulated financial system, including the Johannesburg Stock Exchange (JSE). While infrastructure bottlenecks have emerged in recent years, South Africa’s road, rail and port facilities remain the most advanced in the region. The judicial system is robust, and the diverse skills pool, along with top-ranking tertiary institutions, positions South Africa to capitalize on the anticipated regional economic growth in the coming years.

Political developments continue to pose the biggest risk to South Africa’s long-term prospects. Delays in implementing essential policies to address infrastructural bottlenecks pose a risk to our long-term outlook. While markets welcomed the formation of the GNU in 2024, the potential for a coalition collapse within four years remains a concern. Additionally, policy paralysis may occur due to significant differences in political ideologies regarding growth and ministerial objectives. South Africa is one of the most unequal societies in the world, leaving the risk for social unrest and pressure for social support programs high. State inefficiency, public-sector brain drain, the collapse of service delivery on municipality level, high crime statistics and a vulnerability to adverse weather conditions continue to pose a risk to South Africa’s long-term prospects.

S&P Global Ratings maintained the Positive outlook for South Africa's sovereign risk rating. The unchanged outlook reflects the potential for an improvement in the country’s fiscal metrics and stabilization of government debt beyond current estimates, assuming the coalition government continues its fiscal consolidation efforts. Growth could also exceed expectations, despite risks such as trade and tariffs, if authorities succeed in expediting economic reforms and addressing infrastructure bottlenecks in the economy.

Risk to the forecast

The political party participation in the Government of National Unity (GNU) is expected to ensure policy continuation in areas such as fiscal, monetary, energy, transport, labour and mining. The ongoing implementation and broadening of reforms could strengthen South Africa’s near-term prospects beyond the current baseline.

Private-sector portfolio and fixed investment are delayed owing to mounting concerns about property rights, social unrest and electricity supply. Ongoing adverse weather conditions pose a threat to low food prices, and hence risks raising inflation and lowering purchasing power — with particularly dismal consequences for low-income households.

South African loses preferential trade access to the US under the African Growth and Opportunity Act owing to increasingly strained US-South Africa political relationship. The US imposes financial sanctions on South Africa. The government delays government spending rationalization programs, which include the public-sector wage bill and state-owned enterprise (SOE) inefficiencies. Public-sector debt levels escalate above current expectations, triggering further sovereign credit risk downgrades by international rating agencies, being crowded out of public investment and deterring long-term growth prospects.

An increase in US protectionism, through the adoption of higher tariffs, faster deportation of illegal immigrants combined with the extension of tax cuts, could leave US inflation and interest rates higher for longer and the US dollar stronger than initially expected. Additionally, the Israel-Iran conflict results in a sharp upward spike in global oil prices.

However, there are upside risks to the forecast. Under the new leadership of the GNU, the South African government may launch a series of reforms and policy actions to address the weaknesses in the education system, loss in international competitiveness, the mining charter, and the financial viability and leadership of SOEs. Furthermore, international commodity prices move above the baseline outlook; this improves the growth and exchange rate outlook in the South African economy.

Main data releases incorporated in the update

ReX has been updated with the latest data available from Stats SA, the South African Reserve Bank Quarterly Bulletin (SARB QB), SARS, and several other sources. Over the last quarter, the following notable updates have been incorporated.