Principles-based fiscal anchor may entrench high debt, says Bank of America

The Treasury avoided political friction by adopting a “principles-based” fiscal anchor, a move that could keep the country trapped with a high debt burden for years to come, the Bank of America said on Thursday.

The Wall Street bank wrote that “political considerations were evident” in the absence of a firm numerical anchor in the Treasury’s debt stabilisation strategy, detailed in Wednesday’s 2026 budget review.

“The published statement seems to be drifting away from a hard numerical rule but a softer landing on a more principles-based type of rule. National Treasury will publish a consultation paper and announce next steps in the MTBPS [medium term budget policy statement] for implementation in budget 2027,” the bank’s Tatonga Rusike said in a note.

“Our reading is that it appears political authorities seem reluctant to adopt a hard numerical fiscal rule that could bind future governments. So, it’s possible to see a moving numerical target which can be fungible when governments change.

“Politicians want to protect some elements of spending on infrastructure and social spending. So essentially fiscal rule will not be a hard anchor.”

The IMF has long encouraged local monetary policymakers to adopt a numerical debt rule which would anchor long-term debt at about 60% of GDP, with an intermediate target of 70%.

But the move, which would write limits on government spending into law, has been a source of friction between the government of national unity’s two largest partners, the DA and the ANC, with the latter historically opposing it.

Hoping to find a workable compromise, finance minister Enoch Godongwana announced in his budget speech that the Treasury would pursue an anchor “based on principles rather than on numerical rules”.

It will require each new administration to table a medium-term plan to maintain fiscal sustainability, with the details to be announced in November’s MTBPS.

‘Soft landing’

The move to a fiscal “soft landing” is a concern for the country’s credit rating, which has been stuck in “junk” status from all three of the big agencies since 2020.

Last time South Africa held an investment-grade rating, debt was less than 50% of GDP, with the cost of interest on that debt consuming less than 15% of government revenue. Now it sits at nearly 80% of the economy, meaning that the cost of paying interest on this debt each year exceeds government spending on health or basic education.

Bank of America said it expects S&P to maintain a status quo after its November 2025 upgrade, the country’s first ratings upgrade in two decades.

“In our view, South Africa’s ratings could plateau around BB/BB+ over the next 12 months.

“An investment-grade rating remains unlikely before 2029 as the upcoming political cycle poses risks to GNU cohesion while key credit metrics still need to improve materially,” it said.

In a statement after the Budget Review, ratings agency Moody’s cast doubt on the prospects of debt falling to 75% of GDP in the coming years, in line with the Treasury’s latest forecasts.

“South Africa’s fiscal space to absorb shocks will remain limited. We expect general government debt will remain above 80% of GDP in the coming years, and meaningful debt reduction likely hinges on growth exceeding our baseline,” said Moody’s vice-president and senior credit officer Evan Wohlmann.

Still, the agency said the budget confirmed South Africa’s strong fiscal performance, broad-based revenue growth and improving fiscal prospects.

“Looking ahead, we expect strengthening economic activity, continued spending discipline and lower debt service costs to support a gradual narrowing of the general government deficit.”

Local economists took a more optimistic view of South Africa’s ratings outlook after the Budget Review.

An investment-grade rating remains unlikely before 2029 as the upcoming political cycle poses risks to GNU cohesion while key credit metrics still need to improve materially.

—  Bank of America

Investec chief economist Annabel Bishop said she expects another ratings upgrade from S&P in the next 18 months and by Fitch and Moody’s over the next three years if the debt-to-GDP ratio nears 75% and economic growth accelerates to 3% by the end of the decade.

Johann Els, chief economist at PSG Financial Services, said a ratings upgrade is on the cards.

“This budget is certainly ratings agency friendly, and we expect more ratings upgrades over the next 12 months. South Africa could be back to investment grade within two to three years with at least one of the three big agencies,” he said.

Wednesday’s budget painted a cheerful picture of South Africa’s debt stabilisation progress. The Treasury now expects gross debt to peak at 78.9% of GDP in 2026 before dropping below 75% in five years.

The budget also sees the Treasury lifting its growth estimates for 2025, from a 1.2% forecast in the MTBPS to 1.4% year on year. By 2028, it predicts GDP growth of 2%.

The Treasury’s last major update, the MTBPS, led to the country receiving its first ratings upgrade in two decades.

In November, ratings agency S&P Global upgraded the long-term foreign currency credit rating to BB from BB-, two notches below investment grade, affirming the country’s positive outlook and indicating that a further upgrade is possible if fiscal and economic reforms continue to gain momentum.

Godongwana said at a Wednesday morning press briefing that he does not expect this fiscal anchor to face any political friction, emphasising that the proposal is still in the process of consultation.

“We’re not making any pronouncements for now; we’re just signalling that this discussion is taking place.”