Moody’s says South Africa’s latest budget update shows early signs of fiscal progress — the first in several years — but warns that the country still faces major challenges to stabilise its debt.
In a comment after the release of the medium-term budget policy statement (MTBPS), the ratings agency noted that for the first time since the Covid-19 pandemic, South Africa did not revise its deficit forecast higher than the initial budget. This is thanks mainly to stronger-than-expected tax collections, especially from VAT and corporate income tax.
However, Moody’s noted that “80% of the revenue overperformance is allocated to additional net spending”, leaving the overall fiscal deficit unchanged at 4.5% of GDP, despite a better primary balance.
Moody’s rates South Africa at Ba2 with a stable outlook, which is two notches below investment grade. South Africa has just been upgraded by S&P Global, which aligns it with Moody’s. Moody’s next review of the country’s credit outlook is due on December 5.
Unlike Fitch, which sees a more straightforward route to reducing debt, Moody’s remains guarded about South Africa’s fiscal path.
Moody’s said the government’s strategy for lowering debt rested on several assumptions: “The outlook will also depend on a pickup in economic growth to 2% by 2028, which South Africa has not reached in the past decade, as structural reforms to ease infrastructure and energy constraints advance.”
Moody’s also pointed to risks in assuming revenue would continue growing strongly. Its baseline scenario projects a revenue elasticity of 1.4 for fiscal 2026, meaning revenue would need to grow faster than GDP.
At the same time, primary spending is expected to decline as a share of GDP over the next two years — a sign the government is trying to limit spending to manage its debt.
Another development in the budget was the formal adoption of the 3% inflation target. While this change raised the debt-to-GDP ratio for fiscal 2025 to 77.9% by lowering the GDP deflator, Moody’s sees potential long-term benefits.
“While this has a one-off negative effect, it is more than offset by the medium-term prospective benefit of lower borrowing costs for the government and other South African debt issuers, a net positive for South Africa’s fiscal outlook,” Moody’s said.
Despite the MTBPS showing progress, Moody’s remains cautious about how quickly South Africa can consolidate its public finances: “Under our baseline scenario, we continue to foresee a more gradual fiscal consolidation, moderate pick-up in growth and protracted decline in interest rates leaving government debt-to-GDP broadly stable over the medium term.”
Business Day
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.