A vote of confidence: SA gets first ratings upgrade in 20 years

In a landmark moment for South Africa's macroeconomic narrative, S&P Global Ratings upgraded the country's sovereign credit rating for the first time in two decades. This move lifts the foreign currency rating to BB and the local currency rating to BB+ - both with a positive outlook - signalling a meaningful shift and a welcome vote of confidence in the country's direction.

South Africa’s foreign-currency rating now sits two notches below investment grade, placing it in the same ratings tier as Albania, Brazil, Colombia, Costa Rica, the Dominican Republic, Georgia, the Ivory Coast and Jamaica.

The upgrade is a direct acknowledgment that structural reforms are gaining traction, leading to a clearer upward streak in several key economic metrics.

S&P's decision is underpinned by three primary pillars: stabilising growth fundamentals, robust fiscal consolidation, and the stabilisation of government debt.

Stabilising growth fundamentals

The rating agency sees the country's growth path becoming more stable, expecting real GDP growth to average around 1.5% over the next three years, rising to 1.7% by 2028. This improvement is primarily driven by reforms in the electricity sector which has led to a prolonged period of no loadshedding (over 180 consecutive days), the rapid expansion of private generation and Eskom posting its first profit in eight years. Combined, these issues have materially reduced a major drag on business confidence and investment.

Other positive developments include a stronger and more stable Rand, falling inflation (expected to settle near the 3% target), and the country's removal from the Financial Action Task Force (FATF) grey list. The grey list exit, in particular, boosts the credibility of the financial sector and reduces transaction risks for global investors.

Fiscal consolidation

Fiscal discipline has reinforced the credibility of the government's financial management. Government is expected to achieve a primary surplus (revenue exceeding non-interest expenditure) throughout the medium-term framework, a multi-year trend that rating agencies value highly.

The fiscal deficit is projected to narrow from 4.7% of GDP by 2028, supported by stronger tax receipts from VAT and corporate taxes and controlled expenditure. The intention to introduce more robust fiscal rules from 2026 reinforces the credibility of the fiscal framework.

Debt stabilisation

The stabilisation of government debt has alleviated a long-standing ratings constraint. Government debt is now expected to peak at roughly 79% of GDP this year before a small decline to 77.9% by 2028.

The turnaround at Eskom has been central to stabilising debt, with improved financial performance reducing the need for government support. This significantly reduces contingent liabilities (the risks associated with state-owned enterprises). While Transnet remains a challenge, the introduction of private participation suggests a positive direction.

Tangible benefits for the investment environment

The sovereign ratings upgrade is not merely symbolic; it has tangible benefits for the economy and the investment universe including lower borrowing costs for government. A better rating reduces the risk premium demanded by investors, leading to lower government bond yields. This improves returns for existing bondholders and lowers the state's cost of funding.

The upgrade signals improved macro stability, making South African assets more attractive. This can attract greater foreign investment into bonds, equities, and direct investment, boosting market liquidity and reducing volatility.

Sovereign ratings often act as a ceiling for corporate ratings. An improved sovereign rating means well-rated domestic companies can borrow at cheaper rates, supporting investment and job creation.

In addition, the ratings uplift can help stabilise or strengthen the Rand, which in turn moderates imported inflation. Lower inflation contributes to better real returns and improves household purchasing power.

It also helps shift the narrative about South Africa from one of decline to one of cautious, real improvement. This positive investor psychology supports valuations, improves risk appetite, and encourages both domestic and global allocators to reassess South Africa positively.

SA not yet out of the woods

Despite S&P's improved outlook, South Africa is not yet out of the woods. South Africa remains in “junk status” with other major rating agencies also ranking South Africa as sub-investment grade. Moody’s has assigned South Africa a Ba2 rating since November 2020, which is equivalent to S&P’s BB rating following the recent upgrade. Fitch has rated South Africa at BB since November 2020, positioning it one notch below S&P’s current BB rating.

S&P’s upgrade reflects potential for further improvement, but only if reforms deepen and growth broadens. Amongst the challenges we need to face are low GDP per capita growth - expected to average around 1.6% in the medium term - which is too low to meaningfully raise living standards or reduce high unemployment. Logistics bottlenecks continue to constrain exports and private investment while arrears owed to Eskom by municipalities remain an operational risk. Interest costs continue to absorb around 20% of government revenue, severely limiting fiscal space for social and infrastructure spending. Critically, the Government of National Unity (GNU) must maintain internal stability to keep the reform agenda on track.

The positive outlook means S&P sees the potential for another upgrade, but this is contingent on the sustained and accelerated execution of reforms, particularly in logistics, investment facilitation, and the public sector. It also underscores the need for continued fiscal discipline and effective policy implementation to secure sustainable economic growth. The challenge now is to convert this early progress into a sustained rise in living standards for all South Africans.