South Africa: Green shoots in hard soil

The last few weeks have delivered a rare combination of encouraging economic signals for South Africa – an S&P credit rating upgrade, the rand hitting its best levels in three years, a lower inflation target and South Africa exiting the greylist – all against the backdrop of a volatile global environment that impacts investor sentiment and so the country’s financial market’s performance.

The picture is more nuanced than the headlines suggest. Encouraging reforms and fiscal discipline are gaining traction, along with progress on working down structural impediments, including freight volume improvements, and it is notable the country has halted rolling load shedding.  But the forces shaping the rand, yields and risk sentiment remain overwhelmingly global.

The Rand: Strength meets a stiff global headwind

The domestic currency briefly broke through the R17.00/USD level last week, bolstered by a market-friendly Medium-Term Budget Policy Statement (MTBPS) and anticipation of S&P’s upgrade. The rand strengthened to R16.95/USD before retreating above R17.00 as the US dollar, euro and pound all gained ground.

Hard-currency movements continue to overshadow local developments. Risk aversion had previously risen on the back of the US government’s temporary shutdown, delays in key data releases and growing uncertainty over the US interest-rate path.

Fed funds futures now price only a 42% probability of one more 25bps cut this year, with the Fed signalling it will not ease at every meeting. This has supported the dollar, tempering the rand’s gains.

In short: South Africa has delivered rand-positive surprises, but the global tide is stronger as usual.

S&P upgrades South Africa

S&P upgraded South Africa’s long-term foreign-currency credit rating from BB- to BB, with a positive outlook – the country’s first upgrade by a major rating agency in 16 years.

The agency cited:

• Improving growth and fiscal trajectory
• Reduced contingent liabilities, driven by better performance at Eskom
• Three consecutive years of expected primary budget surpluses
• Outperformance in tax revenues
• Greater reform momentum, notably in electricity and logistics

Crucially, S&P left the door open for another upgrade to BB+ if fiscal consolidation continues, economic reforms accelerate, and growth strengthens.

Fitch remains at BB- (stable), while Moody’s is BB (stable) and their review falls on 5 December. Moody’s is unlikely to move immediately with a rating upgrade, but Fitch may do so, or at least shift to a positive outlook, with Moody’s also potentially following suit on the latter.

The financial markets had already largely priced in the S&P action, but more upgrades are currently likely.

MTBPS: A budget of small steps, not big surprises

This year’s mini budget struck a tone of guarded discipline. While some debt ratios deteriorated on paper, this was driven not by increased borrowing but by lower nominal GDP, itself a function of lower-than-expected inflation.

Key points:

• Revenue projections were revised upwards by R19.7 billion, driven by VAT, corporate and dividend taxes.
• New spending proposals total R15.8 billion, including funds for SARS, Parliament rebuilding, the IEC and disaster relief.
• The budget deficit improves only marginally to -4.7% of GDP, from -4.8% in May.
• Debt ratios rise slightly (to 77.9% of GDP in 2025/26), but debt levels themselves fall compared with May’s projections.
• CPI is now expected to average 3.5% next year, pulling down nominal GDP forecasts.
• Growth projections were trimmed to 1.2% for 2025, with only a modest pickup to 1.5% in 2026.

The headline structural shift was the lowering of the inflation target to 3%, with a tolerance band of 2–4%, the first change in 25 years. This move helped firm the rand but will require consistent policy discipline to anchor expectations.

Despite some metrics looking marginally softer, the MTBPS reinforces a trajectory of slow but steady fiscal consolidation.

Labour market: A tiny dip in unemployment

South Africa’s official unemployment rate fell to 31.9% in Q3, down from 33.2%. While still painfully high, the improvement reflects:

• A decline of 360,000 in the number of unemployed
• A gain of 248,000 jobs, mainly in:
  • Construction (+130,000)
  • Community and social services (+116,000)
  • Trade (+108,000)

Manufacturing and finance shed jobs, constrained by weak local demand and global uncertainty.

Youth unemployment, while improving to 58.5%, remains critically elevated, with 33.9% of 15–24-year-olds not in employment, education or training (NEET). Education and skills development must remain central to policy if South Africa is to turn cyclical improvements into structural change.

The road ahead: Cautiously encouraging, but still vulnerable

Taken together, the past few weeks represents the most constructive macroeconomic period South Africa has seen in some time:

• A ratings upgrade
• A more credible inflation anchor
• A marginally stronger fiscal position
• SA exits the greylist
• A lower unemployment rate
• A rand that, while volatile, is reacting more to global shifts than domestic deterioration

Yet underlying vulnerabilities persist: growth remains too low; debt ratios remain above emerging-market thresholds; global financial conditions are still the dominant risk factor; and structural reforms must accelerate to sustain the momentum acknowledged by S&P.

South Africa has shown progress. But sustaining it will require continued reform discipline and an unequivocal focus on raising long-term trend growth.