The 2026 budget: Holding the Line
The minister of finance, Ericah Shafudah, did rather well in her first proper budget. She faced the stark reality of stagnant revenue amidst a slower economy and pressurised households. She did not announce any worrying surprises on the tax front, but was obliged to describe a not-too-comforting economic and fiscal picture.
It appears to us that the new administration is still settling in, and we give the new finance minister the benefit of the doubt that, if and when revenue grows stronger, the health ratios will improve. By these, we mean, among others, the following ratios: deficit-to-gross domestic product (GDP) (5.8%), debt-to-GDP (67.5%), and interest costs-to-revenue (18%).
Economic conditions
The finance minister is faced with a macro picture that has deteriorated over the past fiscal year—that is, the year ending in fiscal year (FY) March 2026. At the outset last February, the outlook was decidedly positive, with 4.5% plus real economic growth expected. This has now slowed to the 2.9% ballpark.
For the next three years, on average, real GDP growth of 3.3% per annum and nominal GDP growth of 7.2% per annum are envisaged. The latter has been revised stronger from the 5% ballpark expected in the Mid-Year Budget Review (MYBR) of October. We believe that the macro assumptions of the Finance Minister are reasonable and realistic; they do not paint a rosy picture.
Revenue
The upshot is that only small degrees of growth in revenue can be envisioned. One can form a picture of the major income lines—some are expected to grow and others to contract. However, overall, revenue is not expected to grow substantially. This means that the fiscus will be under pressure to fund its expenses and will look to the domestic capital market for funding.
There is quite a list of pending tax measures that need to be finalised. Below are a few that, amongst others, we expect will form part of the Medium-Term Revenue Strategy (MTRS) currently being crafted. We trust that it will not contain other nasty surprises on the tax front. In total, we count 17 measures mentioned in the Fiscal Strategy document:A ceiling on the housing allowance benefit
A cap on the commutable amount of retirement benefits
Dividends from preference shares to be deemed interest income
Exemption of grants received by SOEs
Taxation of long-term insurance businesses to be aligned with corporate tax
Corporate tax rate to be lowered to 28%
A tax rate of 20% in Special Economic Zones
A tax rate of 20% on MSMEs
Deductibility of environmental rehabilitation costs
Expenditure
Much is made of Public Expenditure Reviews (PERs). We expect some information in this regard—specifically, whether the reviews were fruitful, which should result in cutting unnecessary and unproductive spending. The ministry of finance's refusal to expand the overall N$106 billion envelope in the MYBR of October is commendable. It will be challenging to reduce spending in FY27 compared to FY26. However, the Mid-Year Review clearly stated this.
Deficit
Based on the latest estimates of revenue and expenditure, the deficit in FY27 (i.e., the February 2026 Budget) will amount to N$16.6 billion, or 5.8% of GDP. This remains much too large and follows a deficit of 6.9% in FY26, or N$18.5 billion. Over the past decade and a half, the deficit has averaged 6% per annum. Only twice has the deficit fallen below the recommended threshold of 3% of GDP. Therefore, we urgently need to halt the inexorable increase in indebtedness.
Funding
Funding pressure in FY26 was immense because of the deficit, but also due to maturities—the most significant of which was the US$750 million Eurobond. In FY26, N$24.5 billion was funded from the domestic market and in FY27, N$17.3 billion. This rate of borrowing from the domestic capital market cannot be maintained. We would now like to see the normalisation of government borrowing. Otherwise, creditworthiness will not improve, economy-wide borrowing costs will remain elevated, and the government’s funding needs will crowd out other borrowers.
A key principle of the new administration’s policy is how it foresees the role of State-Owned Enterprises (SOEs). These institutions are to drive higher economic growth, and they have to leverage their own balance sheets to raise funding in the capital market.
The government will rather guarantee the debt of viable SOEs to enable them to borrow and grow, rather than take on debt at the centre. It appears that guarantees of up to a "benchmark" of 10% of GDP are envisaged. When nominal GDP reaches N$300 billion, this means that SOE guarantees will amount to N$30 billion. No doubt, SOEs that come to market will be scrutinised by prospective lenders and will have to pay up on the government yield curve.
Conclusion
The 2026 budget showed that the fiscal trajectory has deteriorated compared to recent favourable expectations. Creditworthiness is unlikely to improve, funding pressure will remain high as SOEs join the queue, and the yield curve will remain elevated and steep, but, in our assessment, it is still anchored by low default risk.
Floris Bergh is Chief Economist at Capricorn Asset Management.
