EDITORIAL | Can budget lock in investor goodwill?

South Africa is in a sweet spot. Global investors are not just tolerating our bonds, they are actively seeking them out. Yields have tumbled, the rand has flexed its muscles, and the country’s fiscal signals are, for once, reassuring. The world’s index compliers are taking note, and the country’s sovereign risk premium is shrinking.

Even so, let’s not be seduced by the heady aroma of market rallies and credit rating upgrades. Investor goodwill is fickle. Finance minister Enoch Godongwana has an opportunity to lock in this goodwill for a generation and potentially define his legacy.

Government bonds have staged a rally that would make even the most jaded fixed-income trader sit up and take notice. The 10-year benchmark yield, which soared to a panic-inducing 12% ahead of the 2024 elections, has since collapsed to just above 8%, a level not seen since 2015. The 30-year bond yield has followed suit, compressing more than 200 basis points to 8.9%.

Yes, South Africa is not an outlier in emerging markets, but its performance among emerging markets stands out. The FTSE/JSE all bond index returned about 25% in 2025, and the dollar-equivalent returns outpaced the FTSE world government index by a factor of five.

That rally is not confined to the bond market. The rand has appreciated 20% since April last year, and equities have delivered returns north of 40%. The bond rally and currency appreciations have created a virtuous cycle of lower borrowing costs, reduced debt service costs and improved fiscal space. And the lowering of the inflation target to 3% has anchored expectations, enabling the Reserve Bank to cut rates and support growth.

What explains this sudden surge in investor affection? The answer, as always, is a cocktail of global and local factors. Aside from the commodity windfall from surging gold and platinum prices and global risk appetite, the headline story is fiscal discipline.

For the first time in more than a decade, South Africa is running a primary budget surplus, in which revenue exceeds non-interest spending. That enables Godongwana to pay down debt and reduce the budget deficit. The consolidated budget deficit is projected to narrow from 4.7% of GDP in the 2025/26 fiscal year to 2.9% in 2028/29, with the debt ratio peaking at about 78% before declining towards 70% in the medium term and 60% in the long term.

For the first time in more than a decade, South Africa is running a primary budget surplus, in which revenue exceeds non-interest spending. That enables Godongwana to pay down debt and reduce the budget deficit.

Still, let’s not be lulled by optics. The parliamentary budget office and independent analysts have pointed out that the improvement is driven by a commodity windfall and lower inflation, rather than a structural turnaround in growth and revenue collection. They are not wrong. Any sign of fiscal slippage, policy reversal or external shock will reverse this virtuous cycle. Godongwana must not mistake a wind of opportunity for a blank cheque.

Our market honeymoon is built on the ashes of the lost decade of state capture, policy drift and institutional decay. The progress made in recovering stolen funds, professionalising the public service and reforming procurement has restored a measure of credibility.

But the work is far from complete. South Africa’s structural vulnerabilities have not disappeared because yields fell. Growth remains anaemic, to start with. Contingent liabilities at state-owned enterprises still loom. Policy credibility is fragile, built on recent progress rather than entrenched reform. Investors know this. Their money is here because the near-term trajectory looks better, not because the long-term problem has been solved.

That distinction matters because it defines the task facing Godongwana this week. The budget is a narrow window to convert applause into trust, and trust into lower borrowing costs that endure the next index rebalance and unfavourable commodity swings.