Alay Patel, Co-Portfolio Manager of Barings Emerging EMEA Opportunities, comments on the improved fiscal trajectory and inflation target of South Africa:
“South Africa has unexpectedly found itself in the spotlight for the right reasons. After years of being the classic “never fulfilling its potential” story, the country is now shifting two of the most important anchors for investors: its inflation framework and its fiscal trajectory. On their own, neither change is a magic wand. Together, though, they portray a country whose macro foundations are finally becoming investable again, rather than simply interesting on paper.
“The fiscal outlook has improved meaningfully, with the latest Medium-Term Budget Policy Statement signalling expenditure restraint, a credible path to deficit reduction, and a projected peak in the debt-to-GDP ratio this year, followed by a gradual decline. The adoption of a fixed 3% inflation target (+/- 1% band) marks a significant policy shift, anchoring expectations and aligning South Africa with global peers, while also helping to lower debt-service costs. The South African Reserve Bank (SARB) has long behaved as if it were targeting something closer to the midpoint, but formalising the new target signals a deeper policy alignment: Treasury and SARB are now rowing in the same direction on price stability and lower and more credible inflation expectations reduce the embedded inflation risk premium in assets.
“Political stability has been bolstered by the endurance of the government of national unity (GNU), which managed to pass the budget despite earlier disagreements, and the new fiscal framework is expected to support coalition cohesion over the next five years. The government’s commitment to a primary surplus and a flexible, rules-based fiscal anchor has reassured investors, sparking a rally in the rand and local bonds, and raising expectations of a sovereign rating upgrade.
“Inflation is projected to continue its downward trend, with CPI expected to fall from 3.7% in 2026 to 3.2% in 2028, reflecting both the new target and favourable incoming data. High commodity prices remain a key support for the economy, boosting tax revenues—especially from mining—and helping to offset weaker fixed investment and export growth.
“The South African Reserve Bank (SARB) is expected to maintain a cautious stance, with the improved fiscal and inflation outlook providing scope for a potential rate cut, but policy coordination between fiscal and monetary authorities is now more explicit than ever.
“Looking ahead, the main risks are external—commodity price swings, global financial conditions, and rating agency actions—but the domestic policy mix is now more credible and market-friendly than in recent years. Overall, South Africa is moving toward a more disciplined, more predictable macro framework with fiscal discipline, political pragmatism, and a supportive commodity cycle underpinning a constructive outlook for 2026 and beyond.
“We believe the Johannesburg stock market remains attractively valued, offers stock picking opportunities across a variety of sectors and will feature more prominently on international investors' radar screens in the coming years. We are further encouraged by signs of a revival in the South African IPO market.”
