South Africa going from zero to hero

Ratings agency S&P Global has taken a more optimistic tone on South Africa’s economic prospects, revising its outlook for the country from stable to positive.

However, despite the positive turn, South Africa’s sovereign rating remains at BB-, three notches below investment grade, or three levels into junk status – but the turn is in the right direction.

Delivering its review of the country’s prospects, S&P Global said that it expects South Africa’s GDP growth to increase to 1.4% over 2025 to 2027, higher than the 1.0% projected in 2024.

This is largely thanks to load shedding being eased and all-but removed from the equation; however, logistic bottlenecks are still keeping economic activity constrained, it said.

S&P said that the government of national unity (GNU) can make a marked different though, especially if its planned acceleration of economic reforms can be delivered.

“Despite high gross government debt of about 76% of GDP, fiscal consolidation is ongoing and South Africa benefits from access to deep domestic markets and an actively traded currency.”

We therefore revised our outlook on South Africa to positive from stable and affirmed our ‘BB-/B’ foreign currency and ‘BB/B’ local currency long- and short-term ratings on the sovereign,” it said.

The group said its upside scenario see a ratings upgrade if the government can deliver an improved track record of delivering reforms, and if economic growth can be boosted while government debt and contingent liabilities are reduced.

However, the ratings outlook could turn back to stable or worse if reform progress does not follow through, economic growth comes in lower than expected, or if there is higher-than-expected demand for financing, such as worsening critical infrastructure.

“The positive outlook reflects our view that increased political stability following the May general elections and impetus for reform could boost private investment and GDP growth. Since the formation of the new broad coalition of 11 political parties under the GNU, debt yields and portfolio inflows have improved, leading to easing financing conditions and currency strengthening.

“Despite the government publishing weaker fiscal projections in the most recent Medium Term Budget Policy Statement (MTBPS) compared with those it published in the February 2024 budget, we see higher fiscal policy predictability regarding efforts toward achieving primary surpluses and fiscal consolidation,” it said.

The big risks come in with spending pressure and risks to wages, social spending, and transfers to state-owned enterprises (SOEs), which will keep gross general government debt levels rising to 80% of GDP by fiscal 2027.

This is above government estimates, which forecast debt stabilizing at 75% of GDP by fiscal 2026.

Fortunately South Africa benefits from the sizable and sophisticated financial system that provides a deep funding base for the government,” the ratings agency said.

“The country has relatively strong institutions, particularly its central bank, the South African Reserve Bank (SARB). In our view, the SARB’s proactive monetary policy response has slowed consumer price increases and we expect inflation to inch below the midpoint of the SARB’s 3%-6% target range,” it said.

The agency also made it clear that the GNU is a positive driving force in its review.

“There is renewed business confidence that the GNU government could accelerate growth and business-friendly reforms, as well as improve services delivery.

“Efforts to realise private participation and public-private partnerships in the railway, ports, power and water sectors, and strengthen the regulatory environment could boost private sector investment beyond our expectations,” it said.

It described the GNU as a “coalition”, and lauded its united focus on basic infrastructure, service delivery, investment and narrowing the fiscal deficit.

However, it also flagged potential problems, specifically a “tough battle” to revive growth and maintain fiscal discipline while navigating tricky coalition politics – particularly with opposition parties ready to block legislation and increase instability.

S&P Global also flagged South Africa’s international relations as a possible shortfall, particularly with its foreign policy positions on the Israel-Palestine war, Russia, and possible tensions around the AGOA trade agreement under a Trump presidency.

“We do not expect a material economic impact from a potential AGOA repeal, but geopolitical strains could lead to weaker investor sentiment,” it said.

S&P’s review and assessment of South Africa’s prospects reflect other ratings agencies, like Fitch, that have also laid out a path to ratings upgrades for South Africa on the back of the GNU and more positive economic prospects.

Fitch affirmed South Africa at three levels below investment grade with a stable outlook in September.

Read: South Africa still ‘junk’