Morgan Stanley sees South African budget extending bond surge

The rally in South African bonds is set to gain further impetus when Finance Minister Enoch Godongwana unveils his budget later this month, according to analysts at Morgan Stanley.

They expect him to deliver continued fiscal consolidation when he presents the budget to lawmakers in Cape Town on February 25, reassuring investors and further compressing the risk premium they demand for holding the nation’s sovereign debt.

“This could be one of the most bullish budget documents prepared by National Treasury in many a year,” the analysts wrote in a note to clients. They described the possibility of revenue projections being revised higher, putting the country “in a position of dramatically improving fiscal balances.”

South African assets have rallied strongly in recent months, with yields on the benchmark 10-year government bond declining more than 300 basis points to around 8% from an April 2025 peak.

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Part of that’s been an international story, with lower oil and surging gold prices boosting South Africa’s terms of trade.

But investors have also warmed to domestic developments, including Godongwana’s endorsement of the central bank’s decision to lower its inflation target to 3%, and evidence from his mid-term budget update in November that he’s serious about controlling public finances.

The rand has advanced about 20% against the dollar since April and Morgan Stanley said it remained “constructive” on the currency thanks to its strong link to precious metal prices “with forecasts targeting 15.30 over the coming quarters.” The rand was trading slightly higher at R15.96 per dollar at 11:14 a.m. in London on Monday.

Morgan Stanley expects South Africa’s consolidated budget deficit to narrow to 3.5% of gross domestic product in the year through March 2027 — at the bullish end of market expectations — before declining to 2.6% by 2028-29. The minister projected the 2025-26 budget deficit at 4.7% of GDP in his November update.

Hitting those numbers would widen South Africa’s primary surplus, which measures the budget balance before interest payments on its debt, to 2.6% of GDP in 2028—29 from 1% in the current fiscal year, Morgan Stanley said. It views this performance as key to stabilising debt if spending growth remains anchored near the new 3% inflation target.

Morgan Stanley estimates South Africa’s internal gross funding requirement at roughly R520 billion ($32.6 billion) in 2025-26, with cash balances ending the year near R195 billion.

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That buffer could be deployed to smooth funding needs in 2026-27 and help navigate a heavier redemption profile the following year, limiting upward pressure on bond supply.

Investors will also be alert to any update on a proposed fiscal rule to anchor public finances. Morgan Stanley cautioned that a framework, rather than a binding numerical target, may disappoint those seeking stronger guardrails.

© 2026 Bloomberg

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