Big turn for South Africa is on the table

South Africa lost its investment grade rating in 2017 at Fitch and S&P, while fellow ratings agency Moody’s followed in 2020. 

Tatonga Rusike, Chief Sub-Saharan Africa Economist at Bank of America, said that many reasons led to the downgrade. 

This includes governance weaknesses, lack of reforms leading to negative per capita growth performance and deteriorating public finances. 

The nation fell further into non-investment grade territory in 2020, with a rating of BB- at both Fitch and S&P, and a slightly better Ba2 at Moody’s. 

Although a return to investment grade would be an incredibly challenging task in the near term, Rusike noted that ratings upgrades may start next year, marking a turn in the trend for the country. 

“Our best-case scenario would be two-notch upgrades at Fitch and S&P and one notch at Moody’s within three or four years, taking us to the 2029 election,” he added. 

“Another smooth transition in 2029 could strengthen governance and reform momentum, laying the path for a return to investment grade.” 

He noted that a near-term fiscal improvement could herald the start of an upward trend in ratings trajectory. 

Higher GDP growth could provide more upgrades, even if it is not yet good enough for an investment-grade level. 

Rusike noted that South Africa could post its lowest central budget fiscal deficit since 2016. Bank of America sees the budget deficit at 4.1% of GDP, far better than the baseline of 4.6%

“The country has a firm grip on expenditure, and the pace of revenue collection is high, suggesting fiscal improvements. The Mid-Term Budget on November 12 should confirm this.” 

“The fiscal outlook is even more positive from 2026, once Eskom financing is largely completed and headline deficits of <4% of GDP support large primary surpluses that should put debt to GDP back on a downward trend.” 

Although GDP growth has disappointed in 2025 at around 1%, Bank of America believes that a catch-up is likely in the medium term. 

“Economic reforms are encouraging, and financial markets appear to view South Africa favourably.” 

“Bond yields are lower and credit default swap spreads are at their tightest levels since pre-pandemic, responding to an improving Eskom, Transnet private participation, SARB’s move to a 3% target and likely fiscal improvements.” 

Who will be first 

With Fitch already completing its 2025 reviews, Moody’s and S&P need to issue reports before the year’s end and could find enough support to consider upward adjustments. 

Bank of America believes that S&P is likely to be the first mover after coming close to upgrading South Africa in 2023. 

The ratings agency pulled back from an upgrade in early 2023 following a disappointing Q4 2022 GDP contraction, while 2023 was dominated by high levels of load shedding. 

However, S&P moved to a positive outlook in November 2024, and outlooks for non-investment-grade countries can be resolved within a year. 

“There is room to wait if there are good reasons to convert that positive outlook to an upgrade,” said Rusike. 

“In our view, higher GDP growth is not yet one of those reasons, but likely fiscal improvements could nudge them toward an upward move.” 

S&P’s next review is scheduled for November 14, 2025, but it may choose to wait another six months to upgrade South Africa. Other rating agencies may follow suit from 2026. 

Regarding the nation’s economy, Bank of America expects South Africa’s GDP to grow by a relatively optimistic 1.2% in 2025, 1.4% in 2026 and over 1.5% from 2027. 

Near-term GDP growth improvements are benefiting from an increase in consumption, while the Bank of America’s medium-term forecasts are still conservative amid a lack of investment. 

“Near-term GDP growth improvements are benefiting mainly from an increase in consumption. Our medium-term forecasts are still conservative – we need to see an investment uptick to be more bullish.

“With fewer power cuts, energy shortages have been reduced, while logistics bottlenecks and other reforms are a work in progress.”

“Economic growth forecasts are looking up. Transnet is moving ahead with private participation on the rail and ports network, while Eskom has turned a profit for the first time in eight years.”

On the other hand, Moody’s is more bearish on Africa relative to peers and is less likely to move fast into investment grade.

Issued on BusinessTech by Luke Fraser | https://businesstech.co.za/news/business-opinion/839412/big-turn-for-south-africa-is-on-the-table/