South Africa edges closer to a credit rating upgrade

South Africa is moving closer to a long-awaited credit rating upgrade. The alignment of structural reform, low inflation and a new inflation target, as well as an increasing focus on fiscal prudence, suggests that Standard & Poor’s (S&P) will lift the country’s rating from its current BB–. 

The rating agency’s next review, due tomorrow, comes at a moment when optimism is cautiously returning to South Africa’s economic narrative and could see SA move to BB.

Debt and discipline

Wednesday’s Medium-Term Budget Policy Statement (MTBPS) added a fresh layer of credibility to the country’s fiscal consolidation story. While debt ratios are high, government projections now show lower debt levels over the forecast period than those that were set out in May.

While there is no actual reduction in borrowing, revenue performance has improved. This is due to a planned fiscal target and better-than-expected collections.

The rise in fiscal ratios stems from slower nominal GDP growth. That slowdown is a direct result of lower inflation, not from any forecast real decline in economic activity.

In fact, real growth is expected to accelerate over the medium term.

S&P has previously made it clear that a stronger reform record, leading to faster growth and shrinking debt and contingent liabilities would warrant an upgrade in South Africa’s credit rating. It expects economic growth to average 1.5% between 2025 and 2028; Investec forecasts a higher 1.7% over the same period, following a sluggish 0.5% in 2024. 

Progress on resolving South Africa’s freight and logistics bottlenecks, led by improvements at Transnet, are expected to underpin this acceleration.

In its last review, S&P noted that its positive outlook reflected “the potential for stronger growth than we currently expect, alongside government debt consolidation, if the coalition government can accelerate economic and fiscal reforms while addressing infrastructure pressures”.

South Africa’s coalition government has indeed endured its early tests. Despite disputes over budget allocations, the GNU’s ability to remain intact bodes well for policy continuity and reform momentum.

The inflation anchor

One of the most striking developments announced in the mini-budget was the formal lowering of South Africa’s inflation target range – from 3–6% to 2–4% – with a midpoint target of 3%. This brings South Africa in line with international best practice, reinforcing the credibility of the Reserve Bank’s inflation-fighting credentials.

A lower target, National Treasury argues, will not only bring inflation expectations down but also reduce the inflation risk premium investors demand when lending to South Africa, effectively lowering the country’s cost of borrowing. 

In the short term, it also implies that the Reserve Bank will have room to cut interest rates more than it would have under the old target, providing modest support to growth and fiscal revenue collection.

Fiscal reform and revenue muscle

The government has also moved to entrench fiscal sustainability. The MTBPS introduced plans for a formal fiscal anchor, aimed at improving spending efficiency and balancing public finances.  

In addition, the South African Revenue Service (SARS) has been allocated an additional R7.5 billion over the medium-term expenditure framework to strengthen revenue collection.

Still, fiscal risks remain. An additional R20 billion in revenue will be needed by the end of 2025/26 to avert potential tax increases, despite the welcome shelving of a VAT hike. Much of the revenue windfall earmarked for next year has already been absorbed by spending pressures.

S&P expects gross government debt to average around 80% of GDP between 2025 and 2028 versus government’s previous projections of 76% before declining to 74% by 2028, although the latter has now been revised up in the MTBPS. 

The upward revision in the debt ratio, compared with earlier estimates, stems largely from lower inflation, and therefore slower nominal GDP growth, rather than higher borrowing.

The path to an upgrade

S&P granted South Africa a positive outlook in November 2024. Credit rating agencies do not hold such outlooks indefinitely, typically not beyond 18 months, without either upgrading the rating or reverting to neutral. With economic growth picking up, a new inflation target, and fiscal metrics expected to improve, the conditions are increasingly favourable for an upgrade.

S&P has also acknowledged that the new GNU has developed a coherent reform agenda. Progress in stabilising Transnet and Eskom, combined with credible fiscal management, strengthens the case for an improved sovereign rating as SA is turning the corner.

S&P has had concerns around the risk of new US tariffs for SA, but these have thus far had limited impact on South African exports, with trade routes diversifying successfully toward other markets.

In sum, a convergence of factors – expected tighter fiscal discipline, structural reform, a lower inflation target closer to SA’s key trading partners, and growth momentum – has placed South Africa closer a credit rating upgrade which would bring SA closer to the threshold of investment-grade status than at any point in the past five years. 

Whether that upgrade materialises tomorrow or later, the direction of travel is clear: the country is rebuilding, and with it, investor confidence is growing.