Moody’s expects SA to have an “orderly” budget approval next month — piling the pressure on the two main parties in the government of national unity (GNU), the ANC and DA, to come to a compromise.
The ratings agency said in a note that it expected a budget compromise deal before the budget vote next month, with the ANC still canvassing support for the budget, which includes a VAT hike. There have been only two such hikes in 30 years.
Moody’s said the political disputes would complicate efforts to find new funding sources to address rising social spending pressures in coming years while growth remained low. “This suggests continuing policy disputes in the GNU, making building consensus within the coalition harder. Our baseline assumptions for the GNU factor in frictions in the budget process. In SA, budget revisions at the parliamentary approval stage are new, but they are not unusual for coalition governments in other countries.
“The DA has said that it is open to further negotiations before budget instruments are voted on from April 2. This creates uncertainty around which policy measures parliament will approve though the focus on fiscal consolidation, with debt peaking in fiscal 2025/26, is unlikely to change,” it said.
“Our baseline is for the GNU to reach a compromise, leading to an orderly approval of the budget. That said, uncertainty around fiscal policy would increase, weighing on SA’s policy effectiveness, if disagreements became more entrenched and difficult to resolve.”
Moody’s comments, which carry weight due to its influence on the status of SA’s credit rating, heap pressure on the DA and ANC to pass the budget. As leaders of the GNU, both parties were swept to power in the glow of national goodwill that lifted the mood in boardrooms.
The main contention is the Treasury’s move to raise the VAT rate by 0.5 percentage points this fiscal year. A 0.5 percentage point hike is planned for April 1 2026, raising the rate to 16%.
Business Day reported on Tuesday that ActionSA, which has six National Assembly seats, told the ANC it would not support the budget, joining the DA, MK and EFF in opposing the budget and leaving the ANC with a narrow path to getting the necessary votes to pass the budget.
The official opposition MK, the EFF and Action SA are not in the GNU. Moody’s warned of long-term implications for the GNU should the ANC get the support it needs outside the governing bloc, saying: “The GNU’s future would also become more uncertain if the government had to rely on votes outside the coalition to pass the budget, increasing doubts about its ability to deliver on economic and fiscal reforms.”
Moody’s weighed in on the discussion paper alongside the budget, considering whether a formal fiscal anchor could contribute to a more sustainable fiscal trajectory in SA, saying: “In our view, further progress towards a new legally binding fiscal anchor would, in light of these spending pressures, help improve policy credibility and safeguard debt sustainability.”
Confidence
The imminent VAT hike hit consumer confidence, with the index measuring sentiment plunging from minus 6 to minus 20 index points in 2025’s first quarter. Sanisha Packirisamy, chief economist at Momentum Investments, said she expected household consumption to sustain the recovery, with projected growth of 1.8% in 2025 and 2% in 2026, supported by stable inflation, improving credit conditions, modest employment gains and two-pot withdrawals.
“However, risks remain skewed to the downside, including the potential for slightly higher interest rates amid global uncertainties, the impact of fiscal measures such as VAT increases and bracket creep on disposable income as well as the bouts of load-shedding and souring diplomatic relations which weighed on sentiment in the first quarter of 2025,” Packirisamy said.
“Though the sharp dip in sentiment could partly reverse due to the revised VAT proposal, the drop in sentiment in the first quarter is still concerning for future household spending.”
With Thando Maeko
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