South Africa’s saving grace 

The credibility of the Reserve Bank and its ability to protect the value of the rand are the main reasons why South Africa has not seen its credit rating deteriorate deeper into junk status. 

South Africa’s credit ratings have undergone a decades-long slide from international sweetheart in the mid-2000s to junk status in 2016. 

A key factor behind this decline has been the poor performance of South Africa’s economy, with growth largely stagnating in the past decade. 

The country’s economic growth challenges are largely reflected in the looming financial crisis as the government’s debt-to-GDP ratio keeps rising and is expected to end 2024 at 78%. 

This was not always the case, as the Mandela and Mbeki administrations showed that it was possible to run a tight ship and grow the economy. 

Under these administrations, the government’s fiscal deficit was gradually reduced, South Africa avoided a debt trap, and the economy grew strong. 

The Mandela administration stabilised the economy and achieved a steady growth rate of 2.7%. 

South Africa’s economy flourished under Thabo Mbeki. The government managed to run consistent budget surpluses, and the economy grew strongly at an annual rate of 4.1%. 

The country’s debt-to-GDP ratio was declining during this period, and, in turn, South Africa’s sovereign credit rating greatly improved, reaching investment grade (BBB) in 2002 and even going up to BBB+ in 2004. 

While government spending has skyrocketed since 2008, following a change in administration, it has had no tangible benefit to the local economy. Much of it was mismanaged and did not translate into enhanced service delivery. 

Without a corresponding rise in GDP, the government’s debt-to-GDP ratio surged and global rating agencies began to take notice in the mid-2010s. 

As a result, S&P Ratings began reviewing South Africa’s credit ratings and changed its outlook to negative in 2012. This kicked off a steady decline into junk status, which South Africa entered in 2016. 

This rise and fall is shown in the graph below, with the country’s debt-to-GDP on the right-hand side and on an inverted scale. 

However, things could have been and could still be far worse for the country if key government departments and organisations did not resist state capture and maintain their credibility. 

In particular, the Reserve Bank has been highlighted for its dedication to maintaining its independence, prudent monetary policy, and tight regulation of South Africa’s financial sector. 

In its latest update on emerging markets, S&P Global praised the Reserve Bank and said its credibility remains key to preventing further knocks to South Africa’s creditworthiness. 

“As in the past, the credibility of the South African Reserve Bank, the rand, and the depth of domestic capital markets all continue to underlie our ‘BB-‘ long-term foreign currency rating on South Africa,” the agency said. 

There have been consistent calls from some political parties to nationalise the Reserve Bank or at least change its mandate to stimulate the local economy. 

Such changes would severely impact investor confidence in South Africa and result in foreigners losing trust in the rand. 

S&P said South Africa remains unique among emerging markets in its ability to issue debt in its local currency and thus avoid the dangers of foreign exchange fluctuations threatening a government’s financial standing. 

This is almost entirely down to the Reserve Bank and its protection of the value of the rand through prudent monetary policy and its fierce independence. 

In many ways, the bank, alongside the National Treasury, has been South Africa’s saving grace in the past decade by resisting state capture and maintaining the credibility of the country’s financial system. 

However, its independence was challenged again in 2024, with S&P warning the government’s plan to tap its forex account, held at the Reserve Bank, which threatened its credibility. 

“Granting government access to unrealised profits could politicise the bank and prioritise fiscal needs over broader monetary and economic stability,” S&P’s Zahabia Gupta and Frank Gill wrote in a note earlier this year. 

“This plan is a convenient but limited and temporary solution to the country’s long-standing fiscal challenges.”