South Africa: The long-awaited budget speech

After postponing earlier this year, the 2025 South African Budget Speech, delivered by Finance Minister Enoch Godongwana, introduced several key changes across taxation, social spending, and infrastructure investment. Below are the main highlights:

Taxation

VAT Increase:

The Value-Added Tax (VAT) rate will rise by 0.5 percentage points to 15.5% from May 1, 2025, and to 16% on April 1, 2026. This measure aims to improve fiscal conditions but has drawn criticism for its potential impact on consumers.

Personal Income Tax:

Tax brackets and medical aid credits will not be adjusted for inflation, resulting in "bracket creep," where taxpayers may pay more due to inflation-based salary increases. This is expected to generate R19.5 billion in revenue.

Sin Taxes:

Increases were announced for alcohol and tobacco products.

Social Spending

Social Grants: Allocations for social grants increased significantly:

• Old age and disability grants increased by R130 to R2,315.

• Child Support Grant increased by R30 to R560.

• Foster care grant rose by R70 to R1,250.

• The COVID-19 Social Relief of Distress (SRD) grant was extended for another year until March 2026, with R35.2 billion allocated.

Nearly 28 million South Africans will benefit from these grants, reflecting the government’s commitment to poverty alleviation.

Infrastructure Investment

Over R1 trillion is allocated for public infrastructure over the next three years:

• R402 billion for transport and logistics.

• R219.2 billion for energy infrastructure.

• R156.3 billion for water and sanitation.

Key projects include, R100 billion for maintaining the national road network by SANRAL and an additional R19.2 billion for rail infrastructure upgrades to improve commuter services in areas like Mamelodi and Khayelitsha.

Economic growth is projected at an average of 1.8% from 2025 to 2027, with real GDP growth expected at 1.9% in 2025. Debt-service costs remain a concern, consuming over 22 cents of every rand raised in revenue. Debt is expected to peak at 76.2% of GDP in 2025/26. Other Key Allocations include R9.4 billion was allocated to defense and correctional services, including R5 billion for peacekeeping missions in the Democratic Republic of Congo.

Regal Capital Perspective:

South Africa's primary challenge remains economic growth, a fact widely acknowledged by government officials, political analysts, and investment professionals. The 2025 budget, while addressing some fiscal concerns, does not directly tackle the root causes of slow growth.

The proposed VAT increase from 15% to 15.5% in 2025 and 16% in 2026 is particularly problematic. As a consumption tax, it disproportionately affects the working class, who are the primary drivers of consumer spending. This increase will further constrain already tight household budgets, reducing disposable income that could otherwise stimulate economic activity.

South Africa's extreme income inequality worsens this issue. The country suffers from the highest level of inequality globally, as measured by the Gini index. The concentration of wealth among a small affluent segment, who have a lower propensity to consume, further hinders economic growth potential because, the working class, who tend to spend a larger proportion of their income, find themselves increasingly squeezed by rising costs and stagnant wages.

While the budget allocates significant funds for infrastructure development (over R1 trillion over three years), the effectiveness of this spending hinges on project execution and quality. Past experiences with corruption and inefficiency in public projects raise concerns about the actual economic impact of these investments.

Alternative approaches to stimulate growth could include:

• Government looking to raise revenue through addressing income inequality directly, rather than relying on blanket taxes that hurt the working class who are the biggest consumers in the economy.

• Increased support for entrepreneurship and small businesses, which could create jobs and drive innovation.

• Improving the efficiency and transparency of infrastructure projects to ensure maximum economic benefit.

• Focusing on human capital development through education and skills training to address the skills mismatch in the labor market.

In conclusion, while the 2025 budget attempts to balance fiscal sustainability with social spending, it may not adequately address South Africa's fundamental growth challenges. A more holistic approach that tackles inequality, promotes inclusive growth, and ensures efficient use of public funds could be more effective in stimulating long-term economic development

Botswana: S&P Global downgrades their economic outlook on Botswana from stable to negative but affirms credit ratings.

Botswana's economy is under pressure due to weak global diamond demand and lower prices, which are affecting fiscal revenues and exports. S&P Global Ratings downgraded Botswana's outlook from stable to negative while affirming its sovereign credit ratings of 'BBB+’ in the long term and ‘A-2' in the short-term for both foreign and domestic currency.

Credit Ratings are assessments of a country's ability to repay its debts. In this case, S&P Global Ratings assigns Botswana a "BBB+" credit rating, indicating a moderate level of creditworthiness, meaning the country is relatively stable but exposed to economic risks. An Economic Outlook is the expected future direction of an economy. S&P revised Botswana’s outlook from "stable" to "negative", meaning there's a higher risk that the country’s financial health could deteriorate due to declining diamond revenues and fiscal challenges. Since Botswana’s outlook is now negative, it means S&P may downgrade its credit rating if economic conditions (especially diamond exports) do not improve.

The government faces challenges in fiscal consolidation, with the fiscal deficit expected to remain high despite spending controls. Government debt is projected to rise from 3% of GDP in 2024 to 19% by 2028.

Botswana’s economy contracted by 3.3% in 2024 due to a sharp decline in diamond mining and trading, but non-diamond sectors showed growth. A recovery is expected from 2025 onward as diamond demand stabilizes and government spending supports domestic demand. The new government, led by the UDC, aims to diversify the economy and reduce reliance on diamonds, but structural challenges remain.

The diamond industry faces long-term threats from lab-grown diamonds and shifting global demand. However, Botswana has secured a long-term deal with De Beers to extend diamond mining until 2054, ensuring government revenue stability. The country is also working on diversifying into other minerals, agriculture, tourism, and infrastructure investments.

Despite fiscal deficits, Botswana maintains strong external reserves and a low debt burden. The government is increasing domestic borrowing to fund deficits, and foreign currency-denominated debt remains low. Inflation is expected to remain stable, and the central bank is taking measures to support liquidity and economic recovery. The banking sector remains strong, largely driven by South African banks.

Overall, Botswana’s economic future depends on global diamond market recovery and successful economic diversification efforts.

In February 2025, Botswana's annual inflation rate increased to 2.7%, up from 2.5% in January.

The main contributors to this rise were the Food & Non-Alcoholic Beverages category, which accounted for 0.8 percentage points, and the Miscellaneous Goods & Services category, which contributed 0.7 percentage points. Inflation increased across all regions by 0.2 percentage points, with Cities & Towns rising to 2.3% (from 2.1%), Urban Villages reaching 2.7% (from 2.5%), and Rural Villages climbing to 3.2% (from 3.0%).

The Consumer Price Index (CPI) rose by 0.3%, moving from 135.0 in January to 135.4 in February. Urban Villages saw the largest increase at 0.4%, followed by both Cities & Towns and Rural Villages at 0.2%. Among product categories, Food & Non-Alcoholic Beverages saw a 0.8% increase, driven by higher prices in Fruits (+1.7%), Bread & Cereals (+1.0%), and Coffee, Tea & Cocoa (+0.9%). Other notable increases included Clothing & Footwear (+0.4%) and Alcoholic Beverages & Tobacco (+0.4%).

The All-Tradeables Index rose by 0.4%, with Domestic Tradeables increasing 0.6%, Imported Tradeables rising 0.3%, and Non-Tradeables edging up 0.1%. The All-Tradeables inflation rate reached 2.7%, up from 2.4% in January, driven by an increase in Imported Tradeables inflation to 1.9% (from 1.6%) and Domestic Tradeables inflation to 4.8% (from 4.6%). Meanwhile, Non-Tradeables inflation saw a marginal rise to 2.6% (from 2.5%).

Conclusion

South Africa's economic outlook for 2025 presents a mixed picture. The International Monetary Fund (IMF) projects a GDP growth rate of 1.5% for the year, marking a modest improvement from the 0.8% growth experienced in 2024. However, this growth remains subdued, reflecting ongoing structural challenges.

The nation's unemployment rate is a significant concern, with forecasts indicating a rise from 32.7% in 2024 to 33.2% in 2025. This increase is attributed to the economy's inability to generate sufficient jobs to match the expanding labor force.

Fiscal stability is another pressing issue. While the government aims to stabilize debt levels, Fitch Ratings expresses skepticism, projecting that the debt-to-GDP ratio will continue to climb, reaching 78.8% in the 2025 fiscal year and rising further in subsequent years.

Botswana's economic prospects for 2025 are more encouraging. The country anticipates a rebound, with projected GDP growth rates ranging from 3% to 4%, following a contraction of 3.3% in 2024.

This recovery is largely attributed to an expected upturn in the global diamond market, a critical component of Botswana's economy

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