Moody’s Investors Service upgraded its outlook on South Africa’s credit rating as high commodity prices support the government’s efforts to rein in debt and reduce budget deficits.
The company kept the nation’s foreign- and local-currency ratings at Ba2, two levels below investment grade, and changed the outlook to stable from negative. The move reflects an improved fiscal outlook that raises the likelihood of the government’s debt burden stabilizing over the medium term, Moody’s said in a statement Friday.
“South Africa’s fiscal position has markedly recovered from the pandemic thanks to government’s fiscal consolidation measures and positive external developments,” Moody’s said. “As a result, it now looks likely that the government’s debt-to-GDP ratio will stabilize around 80% over the medium term.”
The stable outlook signals that the downward trend in Moody’s rating of South Africa, which began a decade ago, may be reaching a turning point. The company was the last major firm to take its assessment of the country’s debt to junk, with two downgrades in 2020. Its rating of South Africa’s debt is still a level higher than those of S&P Global Ratings and Fitch Ratings.
Moody’s expects the government to continue pursuing fiscal consolidation, though a rating upgrade would depend on “significant” progress toward easing structural constraints on economic growth, it said.
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The outlook change follows a budget buoyed by windfall mining revenue and forecasts showing government debt will now peak 75.1% of GDP in the 2025 fiscal year — a lower level and a year earlier than previously expected — and a consolidated budget deficit that will narrow faster than previously anticipated. Robust demand and high commodity prices saw an improvement in mining-company profits in South Africa, the world’s biggest platinum producer.
Still, spending pressures including continued support for cash-strapped state-owned companies, a high public-sector wage bill and growing social welfare needs present risks to the stabilizing debt trajectory.
A gradual improvement in tax compliance stemming from efforts to rebuild the South African Revenue Service should give the government “a degree of fiscal flexibility” to mange some of the risks including rising social demands amid price pressures and record-high unemployment, Moody’s said.
The government welcomed Moody’s decision and affirmed its commitment to fast-track debt stabilization, the National Treasury said in an emailed statement. Efforts to reduce debt and lower budget deficits together with an acceleration of economic and state-owned company reforms will provide a stable foundation for growth and ease investor concerns, it said.