Moody’s has given the South African government and the central bank a vote of confidence, saying it expects both to respond appropriately to the risks the Middle East conflict pose to the economy.
The agency, which has a Ba2 rating on South Africa — two notches below investment grade — with a stable outlook, said that despite threats to near-term growth arising from the war between the US and Iran, “we expect the policy response to remain measured and macroeconomic stability to be preserved, limiting the credit impact even under adverse scenarios”.
It said government debt, still above 80% of GDP, remains too high and costly, limiting the country’s fiscal space to absorb shocks.
But the 2026 budget tabled in February confirmed South Africa’s improving fiscal position, supporting Moody’s expectation of debt stabilising this year and gradually declining.
“This credit-positive shift is supported by stronger revenue, greater spending restraint and improving funding costs,” Moody’s said in its issuer report.
“Reform progress will also underpin a gradual improvement in economic growth in the next three years, though sustained high energy prices can disrupt South Africa’s near-term economic growth.”
It also gave the thumbs-up to the lower inflation target of 3% adopted by the South African Reserve Bank (SARB) last year as supportive of a primary budget surplus and lower interest bill.
The conflict in the Middle East, however, poses a near-term risk to growth and inflation outlooks, given that South Africa is a net oil importer adversely affected by sustained periods of high oil prices.
Monetary policy response
“However, we expect the fiscal and monetary policy response to remain measured and proportionate, with the impact on real GDP growth in our current forecasts estimated to be around 20-50 basis points in 2026 and 2027, assuming that inflation averages close to 4% this year,” Moody’s said.
In February the Treasury predicted GDP expansion of 1.6% in 2026 from 1.1% last year, but the IMF has cut its own forecast to 1% from an earlier 1.4%, citing the war.
On Wednesday consumers and businesses endured a second consecutive month of record-high fuel prices due to the war, with the petrol price jumping R3.27, or 14%, to R26.63 per litre in Gauteng, while that of diesel surged R5.27, or 20%, to R31.18.
This was despite the government extending its R3 general fuel levy reduction for petrol and pausing the R3.93 tax on diesel for another month to soften the blow. For this, it will forgo R17.2bn in tax revenue before reinstating the levies by July.
Reserve Bank governor Lesetja Kganyago reiterated on Monday that the inflation outlook has deteriorated and will pull away from the bank’s 3% target, raising the chance of an interest rate hike this year.
“We expect limited fiscal support beyond the current temporary reduction in the fuel levy. This is in line with the authorities’ response to previous oil price shocks, though higher commodity prices should provide some fiscal support,” Moody’s said on Thursday.
“The South African Reserve Bank, which benefits from a high degree of credibility as it looks to re-anchor expectations at the lower target, is likely to look through the shock as long as it expects the impact on inflation to be temporary.”
It said signs of second-round inflation effects, prompting monetary policy tightening and/or a more pronounced global growth slowdown, would probably disrupt South Africa’s economic recovery in 2026 and 2027 and cause its fiscal balance to weaken.
“That said, we expect macroeconomic stability to be preserved, and the commitment to consolidation will remain steadfast, limiting the credit impact even under adverse scenarios,” Moody’s added.
Reforms
Ongoing progress in electricity, logistics and water reforms could materially ease network constraints, helping to boost export capacity and crowd in substantial private investment.
“There is strong momentum in logistics sector reform after the success of the electricity generation overhaul, and greater private participation in rail and ports should support mining and manufacturing output,” the ratings agency said.
Power utility Eskom said last month its ability to generate electricity has improved significantly over the past two years, with energy availability rising from about 55% in 2023 to just over 65% in the 2026 financial year.
On Thursday Moody’s said reforms to South Africa’s water sector are likely to progress more slowly because the challenges are more complex.
It said local government elections set for November 4 will test the durability of reforms under the national coalition formed after May 2024 general elections and led by the ANC and DA.
“Weak local election results can add to political volatility and internal contestation within the main parties comprising the [government of national unity], though they are unlikely to lead to a shift away from current policies,” it said.
Moody’s baseline is for the national coalition to hold through its five-year term until the next general elections in 2029.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.