Fitch rewards fiscal restraint

South Africa received a welcome vote of confidence from ratings agency Fitch in June, with the agency upgrading the country's sovereign credit rating from BB- to BB and assigning a stable outlook.

The upgrade reflects what Fitch described as prudent fiscal management and ongoing fiscal consolidation, despite a challenging economic environment and external shocks. The agency noted that South Africa's debt-to-GDP ratio is now significantly lower than expected when it downgraded the country in 2020.

According to Chris Holdsworth, Chief Investment Strategist at Investec Wealth & Investment International, the upgrade moves South Africa closer to regaining investment-grade status.

Speaking on his podcast, Macro Monday, Holdsworth said: "South African debt is now sitting at about two rungs below investment grade on average across Fitch, Moody's and S&P. Treasury forecasts show debt-to-GDP peaking this year and then starting to decline. If that trajectory is maintained, we could see further upgrades from Fitch and the other rating agencies."

Holdsworth notes that an eventual return to investment-grade status could materially lower borrowing costs. Based on current sovereign pricing models, investment-grade status could reduce South Africa's five-year US dollar borrowing costs by around 30 basis points, while also lowering funding costs for local corporates and providing support for equity markets.

What drove Fitch's decision?

In her weekly Rand Note, Annabel Bishop, Chief Economist at Investec, says Fitch's decision reflects improving confidence in South Africa's fiscal position and reform progress. The agency highlighted easing supply-side constraints in the energy and logistics sectors, alongside expectations that continued primary budget surpluses and stronger economic growth will help keep debt levels on a sustainable path.

While the upgrade initially strengthened the rand to around R16.22 against the US dollar, Bishop notes that gains were later pared as geopolitical tensions in the Middle East escalated. Nevertheless, she points out that the currency has remained more resilient than during previous global risk-off episodes.

Despite the positive momentum, Fitch cautioned that South Africa's rating remains constrained by low economic growth, high unemployment and inequality, as well as elevated debt and interest costs. Further upgrades will depend on sustained declines in debt-to-GDP levels and stronger medium-term growth prospects supported by structural reforms.