S&P Global has given a surprise nod of approval to the government of national unity’s (GNU) reform agenda, raising the outlook on SA’s rating from stable to positive in a move that could see it upgrade the rating if economic growth and public finances improve faster than expected.
S&P retained its rating on SA on Friday night at three notches below investment grade, but said the positive outlook reflected the potential for growth to be stronger than it expected and for government debt to stabilise if the new government could accelerate reforms while addressing infrastructure and fiscal pressures.
Stanlib economist Kevin Lings said S&P’s decision, which analysts had not expected, was welcome and generous, given SA’s low growth rate and fiscal slippage seen in the medium-term budget.
The economy needed all the support it could get in trying to lift investor confidence and inspire increased fixed investment, he said.
In its review on Friday, S&P said: “The positive outlook reflects our view that increased political stability following the May general elections and impetus for reform could boost private investment and GDP growth. The GNU coalition has established a nine point agenda to address basic infrastructure and service delivery shortfalls and weak investments, while gradually narrowing fiscal deficits.”
However, it said the government would face a tough battle to revive growth and maintain fiscal discipline while navigating coalition politics.
A ratings upgrade would turn the cycle after years of downgrades, which began in 2012 and culminated in the last of the big three ratings agencies, Moody’s, cutting SA to junk status as the Covid-19 crisis hit in March 2020.
Ratings tend to have a significant effect on government borrowing costs. While investor sentiment has bounced since the May election, with bond yields falling, ratings agencies and investors have insisted the government needs to step up the pace on delivering reforms if it wants to see sustained improvements to the cost of borrowing.
This is not the first time since the Covid-19 pandemic that S&P has raised its outlook on SA to positive. However, after it did so in another surprise move in 2022, it reversed course in March 2023, taking it back to stable.
The ratings agency said on Friday it could raise the ratings if an improving track record of effective reforms resulted in a structural strengthening of economic growth and reduced government debt, but it warned it would revert to a stable outlook “if ongoing economic and governance reforms do not progress”, resulting in worse growth and fiscal prospects.
S&P also warned that SA’s stance on the Israel-Hamas war and relations with Russia had caused tension with key Western trade partners and within the GNU coalition, and this might affect market sentiment.
“We do not expect a material economic impact from a potential [African Growth and Opportunity Act] repeal, but geopolitical strains could lead to weaker investor sentiment,” said the ratings agency.
S&P has improved its growth forecast to an average 1.4% for 2025-2027, from an expected 1% this year.
We think the government is unlikely to provide support similar to the Eskom debt relief package to other SOEs.
— S&P Global
However, it said on Friday the planned acceleration of economic reforms by the new GNU and a pickup in private investment could bolster prospects more than it expected. It expects the government’s debt ratio to rise to 80% by fiscal 2027, in contrast to the National Treasury’s projection that the debt will stabilise at 75.5% in fiscal 2026.
It said: “Fiscal consolidation is ongoing and SA benefits from access to deep domestic markets and an actively traded currency.”
S&P also signalled it no longer expected the government would provide a debt relief package to Transnet as it had to Eskom. It has lowered its forecasts for off-budget spending for state-owned enterprises compared to its previous review, it said.
“We think the government is unlikely to provide support similar to the Eskom debt relief package to other SOEs.”
S&P’s decision to put the rating on positive outlook is in contrast to rival Fitch, which earlier this month expressed scepticism about the Treasury’s ability to deliver on October’s medium-term budget estimates, saying the government would probably have to spend more on public sector pay and on bailing out Transnet than it budgeted for, and debt would end up higher.
However, it conceded if the Treasury could achieve its targets, it would be positive for SA’s credit ratings, as would an uplift in economic growth over the medium term.
The Treasury welcomed S&P’s decision to revise SA’s outlook and affirm its foreign and local currency ratings. “The agency sees higher fiscal policy predictability regarding efforts towards achieving primary surpluses and fiscal consolidation,” it said.
The government’s strategy focused on achieving fiscal sustainability, supporting economic growth and critical social services, and addressing significant fiscal and economic risks, it said.
The news from S&P comes after a tough few days for the rand, which fell to levels last seen in mid-August after Donald Trump won the election to be the next president of the world’s largest economy.
The local currency did get something of a reprieve on Friday, however, after five successive days of losses, and at 11.35pm it was 0.5% firmer at R18.19/$1.
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