Moody's gives mixed signals on South Africa's economic future despite praise for key institutions

4 Dec 2024

Credit rating agency Moody’s has given a nod to South Africa’s core institutions such as the judiciary and the central bank, affirming their strength. However, the agency is still worried about the country’s economic and fiscal performance, which remain weak.

Moody’s Ratings has joined S&P Global in striking an upbeat tone about aspects of South Africa and its economy, with the credit rating agency affirming its assessment of the country and keeping it on a stable outlook.

Moody’s has given the nod to South Africa’s core institutions such as the judiciary and the central bank, affirming their strength, also praising the country’s “robust, deep financial sector and a solid external position”.

However, that’s where Moody’s praise ends as its assessment of South Africa, released on Tuesday 3 December 2024, indicates that the country's road to reform is still bumpy and long.

The rating agency said South Africa’s economic and fiscal performance remained weak and could perform better than expected if the structural reform agenda was accelerated.

Because of this challenge, Moody’s has kept the rating of South Africa’s long-term foreign and local currency debt at Ba2, which is two notches below investment grade. In other words, Moody’s still has South Africa’s credit rating firmly placed on junk status — a position the country has been in since the Jacob Zuma presidency, which was marred by low economic growth, systemic corruption, and government spending that weakened public finances.

Junk credit rating

A junk credit rating means local and global investors see risk and doubt the government’s ability to pay back debt and interest costs. Credit rating agencies operate like credit bureaus, but at a country level. They assess a government’s creditworthiness and ability to pay debt and interest costs.

Moody’s believes that public finances are weak, and because of this, the government is at risk of defaulting on debt repayments worth R5.6-trillion in the fiscal year 2024/5 — most of which is denominated in local currency and has a longer repayment profile. The interest cost on the debt is R389-billon in the current fiscal year.

This risk means that when the government borrows in international markets, it does so at higher interest rates. This worsens the government’s debt and interest payment position, which weakens its ability to fund service delivery programmes such as funding health and education.

Moody’s has also affirmed its “stable” outlook on South Africa, indicating that it sees no reason to change the rating in the near future.

Moody’s update comes after S&P Global upgraded its outlook on South Africa from stable to positive on 15 November, citing improved reform and growth potential.

Read more: Rating agency S&P Global revises SA’s outlook to positive, but still less optimistic than Treasury

However, S&P’s rating on South Africa is one notch below that of Moody’s, as is that of the third big global ratings agency Fitch.

Moody’s update was issued on Tuesday after the release of surprising figures on South Africa’s performance during the third quarter of 2024. During this period, South Africa’s economy contracted by 0.3%, which was in contrast to market expectations for an expansion of between 0.4% and 0.5%.

Read more: SA’s GDP growth wilts as agriculture suffers fall of almost 30%

This prompted some economists, including those from FNB, to revise their growth forecasts for 2024, saying their consensus of a 1% growth outlook was increasingly unlikely.

Moody’s probably compiled its credit rating report before the release of the latest figures for the economy’s performance. It had projected economic growth of 1.7% in 2025/26 from 1.1% in 2024 driven by domestic demand, a less restrictive monetary policy, and continued favourable commodity prices. It expects the energy sector to increasingly drive private investment.

“However, this level of growth is unlikely to significantly reduce unemployment or mitigate social pressures,” it said.

The National Treasury welcomed Moody’s acknowledgment that the Government of National Unity would pursue structural reforms and ease growth bottlenecks, and said economic reforms were beginning to bear fruit.

“Electricity availability has improved, the logistics system is stabilising and the cost of business is declining in some areas of the economy. The government is also transforming the way it prepares and delivers infrastructure projects,” the Treasury said in a statement issued on Tuesday night. DM

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