South Africa set for brighter fiscal outlook in Wednesday's mid-term budget

South Africa's finance minister is expected to present an improved fiscal outlook in his mid-term budget on Wednesday, with a revenue windfall bolstering a push ‌to regain an investment-grade credit rating.

But record fuel prices, weak growth and pressure to spend ahead of November 4 local government elections could limit how much of the windfall the Treasury saves. Africa's most industrialised economy remains stuck in a low-growth rut, with the IMF forecasting growth of just 1% ‌this year. Investors will be watching whether Pretoria uses stronger tax receipts to cut debt and shore up fiscal credibility or spends more.

Corporate tax receipts ‌jumped 22.8% in the first five months of the fiscal year, driven by strong mining profits, BNP Paribas said. VAT receipts rose 9.1% and personal income tax 8.4%. BANKS EXPECT BUDGET DEFICIT TO NARROW

"We believe that there's going to be a more than 50 billion rand upward revision to revenue estimates relative to February," Jeffrey Schultz, head of CEEMEA ⁠economics at ​BNP Paribas Markets 360, told Reuters. Goldman Sachs ⁠estimates revenue could beat Treasury projections by 40 billion rand.

But both banks expect the Treasury to factor in only 10 billion-20 billion rand of the windfall. They see the ⁠main budget deficit narrowing to 3.3%-3.6% of GDP this fiscal year from February's 3.7% target. BNP expects debt-to-GDP to fall over the medium term after peaking at 78.2% in ​2025, an important shift after years in which rising debt has squeezed the government's room to spend.

FISCAL ANCHOR DETAILS EXPECTED Finance Minister ⁠Enoch Godongwana is also expected to unveil details of a formal fiscal anchor aimed at keeping government borrowing and debt in check. Goldman expects the framework to be "principles-based" rather than ⁠a ​fixed numerical target.

Moody's Vice President Evan Wohlmann said the agency would scrutinise the anchor's design, including "potential carve-outs" and how quickly the government would be required to correct any deviation. Goldman expects S&P Global to raise South Africa's rating to BB+ at its November 27 review, one notch below ⁠investment grade, and sees a possible upgrade from Moody's, which has a positive outlook.

BNP's Schultz said the hurdle for returning to investment grade was higher. "The ⁠bar is probably a little bit ⁠higher beyond one more immediate upgrade, and that bar really comes from getting growth," he said.

The fiscal improvement faces headwinds. Inland petrol topped 30 rand a litre for the first time this month after the Middle East ‌conflict pushed oil above $100 ‌a barrel, while growth remains weak.