Fiscal constraints worsen business confidence
Mbongeni Mguni | Monday June 1, 2026 06:00
The central bank’s latest Business Expectations Survey (BES) covering the period between the first quarter of the year, the second quarter and through to March 2027, found that the difficult, broader economic conditions were weighing down on local firms.
The survey covered 100 firms across various sectors of the economy and attained a 54% response rate, up from 50% in the December 2025 edition of the BES.
Researchers noted that pessimism had increased generally across the business landscape.
“Overall, firms were more pessimistic about business conditions in the first quarter of 2026 compared to the fourth quarter of 2025, reflecting constrained operating conditions for businesses in the short-to-medium term,” the BES reads. “This pessimistic outlook largely stems from the country’s weaker fiscal position, characterised by lower government revenues, constrained cash flows and, consequently, a restrained pace of government spending.”
Despite the lower business confidence, surveyed firms still expect the economy to grow by 1.7 percent in 2026, compared to last year’s 0.7 percent contraction.
“The positive outlook suggests a gradual stabilisation in growth momentum, broadly aligned with the Ministry of Finance’s projection of 3.1 percent growth in 2026. “For the first and second quarters of 2026, firms anticipate modest growth of 0.9 percent and 1.4 percent, respectively,” central bank researchers reported.
However, within the first quarters, the survey found that most sectors were pessimistic about business conditions, with a slight warm up to neutral in the second quarter and for the period to March 2027.
In terms of factors driving the pessimism in the first quarter, the central bank found that firms were particularly concerned about an unfavourable foreign exchange environment, followed by government spending and domestic demand.
The Finance ministry and the BoB made significant changes to the foreign exchange framework last year, which, whilst they slowed down the depletion of the country’s foreign exchange reserves, did introduce volatility on the rates firms and households incurred.
Government spending, meanwhile, has been under pressure since the beginning of the diamond downturn in 2023, resulting in faster erosion of government's savings and higher public borrowing. Analysts have noted that the significant increase in government borrowings on the local market is pushing up the cost of borrowing for local businesses, in an environment of tighter liquidity.
“Firms expect lending interest rates to increase across all markets, domestic, South Africa and elsewhere, in the year to March 2027,” BES researchers reported. “This expectation is likely influenced by currently elevated domestic lending rates amidst liquidity distribution challenges in the banking system and weak domestic economic activity.”
Surveyed firms also expect higher overall cost pressures in the second quarter of 2026 compared to the first quarter, partly due to the war in the Middle East, through its effects on commodity prices, supply chains, and overall business operating conditions.
As at March 2026, the firms, however, expected inflation to average 4.5 percent in both 2026 and 2027, remaining within the central bank’s three to six percent medium term objective. It’s unclear whether the March BES covered the March 27 increase in fuel pump prices, which rose by as much as P8.77 and quickened April inflation to 10.3%, the highest level since December 2022.
The spike in fuel prices and consequently inflation, was driven by the Middle East conflict, which sent international oil prices spiralling.