Moody’s Ratings has described South Africa’s latest medium-term budget as credit positive, citing improving fiscal discipline and signs that government debt has peaked, while warning that high borrowing costs and weak economic growth remain significant challenges.
The agency said in an October 26 assessment that fiscal consolidation remained on track despite higher oil prices, tighter monetary policy and weaker nominal GDP growth than anticipated in February, according to Reuters.
South Africa’s sovereign rating remains Ba2 with a positive outlook, two notches below investment grade. The assessment was commentary on the government’s fiscal plans, not a new rating action.
The government reduced its consolidated budget deficit forecast for fiscal 2026/27 to 3.9% of GDP from the 4.0% projected in February, supported by a ZAR17.1bn ($1.03bn) upward revision to gross tax revenue.
Finance Minister Enoch Godongwana said in his October 21 Medium-Term Budget Policy Statement that stronger corporate income tax, dividends tax and value-added tax collections had improved the revenue outlook.
However, much of the additional revenue reflected higher commodity prices and was unlikely to be sustained over the medium term, he warned.
Debt stabilises but servicing costs remain high
Moody’s forecasts that South Africa’s general government debt will decline to 84.9% of GDP by fiscal 2028 from approximately 86.8% in fiscal 2025, suggesting that the debt burden has peaked.
Its broader debt measure includes most government guarantees to state-owned enterprises, helping explain why it exceeds the Treasury’s narrower government debt estimate of 78.4% of GDP for 2025/26. The two measures are not directly comparable.
Debt affordability remains weak. Interest payments absorbed 18.8% of general government revenue in fiscal 2025, limiting resources available for infrastructure, public services and other spending priorities.
The Treasury also cut its 2026 real GDP growth forecast to 1.2% from 1.6% in February, reflecting weaker economic activity and deteriorating global conditions.
Growth is expected to recover to 1.6% in 2027 and reach 2% by 2029, although sustained fiscal improvement will depend partly on stronger economic expansion.
Proposed fiscal rules receive cautious backing
Moody’s described draft legislation establishing a principles-based fiscal anchor as credit positive, saying it was intended to strengthen budget discipline and accountability.
The framework would require future governments to set medium-term fiscal objectives, explain material deviations and submit their plans to greater independent scrutiny.
However, it would not impose a binding numerical debt ceiling or deficit limit, leaving its credibility dependent on consistent implementation, Moody’s said.
The Treasury published the proposed legislation for consultation in October and expects to submit it to Parliament in 2027.
Moody’s revised South Africa’s rating outlook to positive from stable on May 22, 2026, while affirming its Ba2 rating, citing improving fiscal performance and progress on structural reforms.
The October assessment reinforces that view without changing the rating. While the budget points to improving fiscal management, elevated debt-servicing costs and subdued growth remain obstacles to a stronger sovereign credit profile.