Fitch Ratings has affirmed South Africa’s long-term foreign and local currency debt ratings at BB-, one notch below investment grade, while retaining a negative outlook, reflecting ongoing concerns over growth prospects and fiscal risks. According to a statement from Fitch Ratings, the recent Medium-Term Budget Policy Statement demonstrates the government’s dedication to gradual fiscal consolidation, which could bring public debt closer to stabilisation in the coming years.
Analysts at the agency suggest that incorporating the updated financing approach into their models could help steady gross government debt levels. However, they caution that uncertainties remain around the official revenue projections and economic growth assumptions. Fitch forecasts real GDP expansion of 1.2% for both 2026 and 2027, notably lower than the government’s estimates of 1.5% and 1.8% respectively, primarily because of a more cautious view on fixed capital investment.
This subdued growth outlook is expected to limit potential tax revenue increases and exert pressure on key fiscal indicators. The agency also adopts a conservative stance on potential savings from reduced interest costs, noting that the extended maturity profile of South Africa’s debt will delay the benefits of falling yields, even as lower inflation persists.
The budget statement projects average inflation of 3.3% by 2027, down from 4.3% anticipated in the previous budget, aligning closely with Fitch’s own September projection of 3.6%. A significant development highlighted in the policy statement is the formal adoption of a 3% inflation target, with a one percentage point tolerance band either side, fostering greater harmony between monetary and fiscal policies.
This adjustment is viewed positively, as it promises enhanced macroeconomic predictability and stability. By bringing domestic inflation in line with major trading partners, the change could ease persistent downward pressures on the rand over the longer term.
Presented in Parliament earlier this week by Finance Minister Enoch Godongwana, the Medium-Term Budget Policy Statement marks a turning point in South Africa’s fiscal trajectory amid lacklustre economic performance. As reported by Business Day, it introduces modest but believable enhancements to the fiscal framework, such as a slightly reduced budget deficit, an expanding primary surplus, and gross loan debt peaking at 77.9% of GDP in the 2025/26 financial year before easing to 77.7% and then 77.4% in the following years.
These debt ratios are marginally higher than those outlined in the May budget yet remain near Fitch’s earlier baseline scenarios from their September review, when the rating was last confirmed. Stronger-than-anticipated tax collections, driven by value-added tax and corporate income tax, have allowed the National Treasury to bolster its position without increasing borrowing or implementing deep spending reductions, thereby bolstering confidence in policy execution.
The decision to scale back bond issuance and steer clear of fresh state-owned enterprise bailouts or pre-election fiscal giveaways further underscores a renewed emphasis on discipline. Additional revenue overruns, partly from improved compliance and economic activity, have enabled allocations towards infrastructure and priority areas without derailing consolidation efforts.
As noted in the official speech by the Finance Minister and summarised by National Treasury, the government has drawn on reserves, including increased withdrawals from the Gold and Foreign Exchange Contingency Reserve Account, to support this strategy while maintaining a path towards primary surpluses over the medium term. This approach, combined with structural reforms in energy and logistics, aims to lift potential growth and attract private investment, addressing longstanding constraints on South Africa’s economy.