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 R50-billion 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 R40-billion.

But both banks expect the Treasury to factor in only R10 billion-R20 billion 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.