Moody's: South Africa upgrade hinges on fiscal discipline

Moody’s Ratings has signalled that South Africa stands on the threshold of its first credit-rating upgrade since 2009, but the decision rests squarely on whether the government sustains the fiscal discipline and reform agenda that brought the country to this point. The agency, which rates the country at Ba2, two notches below investment grade, revised its outlook on South Africa to positive from stable in May. It now says the country has reached an inflection point after stabilising its debt and delivering pro-growth economic reforms.

The accountability question was put plainly by Evan Wohlmann, a vice president at Moody’s, who told a virtual media briefing on Tuesday that the agency could upgrade the rating if fiscal performance continues to improve. The assessment, he said, would hinge on confidence in how the country’s credit profile evolves. That places the burden of proof on the office-holders responsible for the national budget.

The responsibility falls first to Finance Minister Enoch Godongwana, who is due to deliver his mid-term budget review on October 21. The review is expected to show continued growth in the primary budget surplus, a gauge of how much revenue exceeds non-interest expenditure, supported by higher income. Such a result would supply the fiscal evidence Moody’s is looking for as it weighs whether the government’s stated commitments are being met in practice.

The numbers underpinning the agency’s baseline forecast point to a debt trajectory that is finally bending in the right direction. Debt peaked in the last fiscal year at 87% of gross domestic product and is projected to decline gradually to 84% of GDP by the end of the decade, supported by an uptick in economic output. That projection depends on growth materialising in an economy that has expanded by less than 1% on average over the past decade. Structural reforms are beginning to deliver results, according to Nedbank Group, which predicts growth will edge up to 1.9% over the next two years, with 2.5% possible by 2030.

Political pressure on the governing dispensation is nonetheless building. The country holds municipal elections on November 4, a vote that may result in a further loss of support for the African National Congress and bring additional pressure to bear on President Cyril Ramaphosa, who is due to step down as the party’s leader at the end of next year ahead of general elections in 2029. Despite this crowded electoral calendar, Moody’s sees limited risk of the reform path being abandoned. “We see the risk of a reversal in policy from the forthcoming electoral cycle as limited,” Wohlmann said, pointing to South Africa’s shift to a coalition government in 2024 after the ANC lost its parliamentary majority amid public anger over high unemployment and poor service delivery.

The agency’s own track record offers a statistical guide to what may follow. Moody’s upgrades roughly 60% of the sovereign credits to which it assigns a positive outlook, a historical pattern that will shape how markets and policymakers read the current rating action.

Even so, restoring South Africa’s investment-grade status may take considerable time. The precedent is instructive: eight years separated Moody’s initial downgrade of South Africa, when the country was lowered to Baa2 from Baa1 in 2012, and the cut that pushed it below investment grade in 2020. Lucia Villa, Moody’s senior vice president for ratings, noted that based on past experience there are roughly twice as many annual notches in a downgrade cycle, or consecutive negative rating actions, as in an upgrade cycle on average.

For an audience tracking institutional performance, the message from the rating agency is unambiguous. The technical conditions for an upgrade are in place. What remains uncertain is whether the treasury and the broader government can keep meeting the fiscal and reform commitments that earned the positive outlook, and whether October’s mid-term budget delivers the surplus Moody’s is waiting to see.