By Colleen Goko and Kopano Gumbi
JOHANNESBURG (Reuters) -South Africa could secure its first credit rating upgrade in nearly two decades on Friday when S&P Global delivers its latest sovereign rating decision, amid investor optimism over its reform efforts.
Since 2020, South Africa has been rated as sub-investment grade – or “junk” – by all three major rating agencies. Analysts, however, now see grounds for an upgrade by S&P to ‘BB’ from ‘BB-‘, citing fiscal consolidation and policy improvements.
If realised, the new rating would still be two notches below investment grade. An eventual return to investment grade could pave the way for billions of inflows of investor money into Africa’s biggest economy.
RESTORING FISCAL CREDIBILITY
Goldman Sachs and JPMorgan highlighted key metrics supporting an upgrade, including a contained peak in national debt, three consecutive years of primary budget surpluses, and the formal adoption of a 3% inflation target.
“We think that fiscal improvements, along with slightly stronger recent growth, will warrant a sovereign rating upgrade by S&P,” said Andrew Matheny of Goldman Sachs International.
Investor optimism lifted the South African rand to its strongest levels since early 2023 this week, while local bond yields fell to multi-year lows. Additionally, credit default swaps, a barometer of default risk, tightened as investors welcomed the stronger fiscal framework.
However, low economic growth remains an obstacle. The era of governance scandals and institutional weakening, most prominently during former President Jacob Zuma’s tenure, eroded public institutions and drove debt levels higher, leading to multiple rating downgrades.
Moody’s removed South Africa’s last investment-grade status in March 2020.
Treasury officials have emphasised efforts to restore fiscal credibility.
“These are achievements that many people thought even just a year ago were completely unachievable and unthinkable,” said Duncan Pieterse, Director General of the National Treasury.
“At some point, the rating agencies will have to pay attention to that.”
Other positives have included South Africa’s recent removal from the Financial Action Task Force’s “grey list” of countries monitored for the risk of illicit money flows, as well as a still-functioning government of national unity.
But uncertainties remain.
Thys Louw, a fixed-income portfolio manager at Ninety One, put the likelihood of an upgrade at 50/50, citing strong fiscal performance but a lack of evidence that South Africa has exited its persistent low-growth cycle.
S&P rates South Africa at ‘BB-/B’ with a positive outlook. Fitch has a ‘BB-‘ rating with a stable outlook, and Moody’s rates the country at Ba2 with a stable outlook.
(Reporting by Colleen Goko and Kopano Gumbi. Editing by Karin Strohecker and Mark Potter)
