Moody’s says SA’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 following the release of the medium-term budget policy statement (MTBPS), the ratings agency noted that for the first time since the Covid-19 pandemic, SA 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 SA at Ba2 with a stable outlook, which is two notches below investment grade. SA 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 SA’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 SA has not reached in the past decade, as structural reforms to ease infrastructure and energy constraints advance.”
Read: Economists welcome S&P upgrade, but caution against complacency
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 SA debt issuers, a net positive for SA’s fiscal outlook,” Moody’s said.
Despite the MTBPS showing progress, Moody’s remains cautious about how quickly SA can consolidate its public finances: “Under our baseline scenario, we continue to foresee a more gradual fiscal consolidation, moderate pickup in growth and protracted decline in interest rates leaving government debt-to-GDP broadly stable over the medium term.”
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