Finance

South Africa can go from junk to investment grade

South Africa is on track to escape ‘junk’ status within the next three years as the country’s financial health improves and economic growth picks up. 

This is feedback from Sub-Saharan Africa economist at Bank of America, Tatonga Ruskie, who outlined the country’s journey back to investment grade at a recent roundtable. 

The potential upgrade of South Africa’s credit rating would mark the end of a 15-year period where the country’s reputation among global investors plummeted. 

South Africa’s credit rating improved during the first decade of ANC rule, with all three credit rating institutions – S&P Global, Fitch, and Moody’s – rating the country well above investment grade. 

This was on the back of a period of fiscal discipline and strong economic growth during the Mandela and Mbeki administrations. 

These presidencies focussed on gradually reducing the fiscal deficit, avoiding a debt trap, and limiting increases in government spending. 

The Mandela administration was able to stabilise the economy and achieve 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. 

Things changed quickly after Jacob Zuma dethroned Mbeki as ANC President. Pravin Gordhan took over from Manuel as Finance Minister, after which government spending spiked.

South Africa’s strong GDP growth during the Mbeki era stopped, and the country’s debt rapidly increased as the growth in government spending did not translate into enhanced economic activity. 

This reckless spending and increased debt took its toll on South Africa’s sovereign credit ratings, which plummeted to well below investment grade.

Moody’s dropped South Africa two notches below investment grade, while Fitch and S&P rated the country three notches below investment grade.

Rusike said this trend has been effectively halted by the current administration, with particular credit going to Finance Minister Enoch Godongwana and the National Treasury. 

The global reputation of the South African Reserve Bank has also helped the country maintain credibility with international investors. 

National Treasury’s fiscal discipline and key reforms in network industries such as electricity, logistics, and water are set to significantly improve South Africa’s attractiveness as an investment destination. 

Rusike explained that the government is on track to stabilise the debt-to-GDP ratio and begin reducing its debt burden in the coming years. 

The National Treasury has effectively limited government spending growth to around headline inflation, and improved tax collection has enabled the state to run a primary budget surplus. 

This means the government collects more tax revenue than it spends, excluding debt-servicing costs. The government still runs a full budget deficit. 

However, a primary budget surplus is key, Rusike explained, as it means the government is no longer adding to its debt pile and should be able to reduce its debt burden over the medium term. 

As growth picks up, all other things being equal, the government’s debt-to-GDP ratio should decline. Furthermore, tax revenue should pick up and enable the state to pay down its debt. 

This will reduce its debt-servicing costs, freeing up additional capital to invest in growing the economy or paying down its debt further. 

Rusike said that South Africa is on track to kickstart this virtuous cycle, with the government on track to meet its targets. 

For the current financial year, government spending has only grown around 4%, while tax revenue has increased by 5.3% – widening the primary budget surplus. 

If this trend continues, Rusike said that it is entirely possible for South Africa’s credit rating to improve by two notches in the next three years. 

Rating agencies will begin by shifting their outlook for the country from neutral to positive in either May or November 2025, with the first upgrade in 2026. 

This is highly dependent on improved economic growth and the National Treasury keeping a tight lid on spending, particularly with regard to public sector wages and a potential basic income grant. 

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