Moody's Ratings has announced that South Africa's government debt trajectory is stabilizing, with expectations of a decline starting this year, supported by stronger revenue and restrained spending. The agency estimates that general government debt peaked at 86.8% of GDP in the fiscal year ending March 2026, a figure notably higher than the National Treasury's own forecast of 78.9%. Moody's projects the debt ratio will ease to 84.9% by 2028, but cautions that levels above 80% significantly limit the country's fiscal flexibility.
This development comes as South Africa awaits a key ratings decision from Moody's this month. The country currently holds a Ba2 rating with a stable outlook, two notches below investment grade. Recent positive momentum includes improved investor interest following February's budget and an upgrade from S&P Global Ratings to BB with a positive outlook, the first such upgrade in nearly two decades.
The agency forecasts the general government deficit will narrow to 4.3% of GDP in 2026, further tightening to 3.8% by 2027, down from 4.5% in 2025. A primary surplus of 1.8% of GDP is expected in 2027, exceeding the 1.5% threshold Moody's considers necessary for debt stabilization. Finance Minister Enoch Godongwana has emphasized structural reforms in energy, logistics, and local government as key to reviving growth.
However, fiscal space remains constrained. Interest costs consumed 18.8% of general government revenue in 2025, a burden heavier than many similarly rated peers. The Iran war presents a significant external risk, with Moody's estimating it could reduce South Africa's growth by 20 to 50 basis points in 2026 and 2027, depending on the impact on inflation and fuel prices.
George Glynos, director and head of research at ETM Analytics, noted that the duration of the conflict is critical. Restoring disrupted markets for oil, shipping, gas, and fertilizer will require months, not an immediate fix. South African Reserve Bank Governor Lesetja Kganyago has urged policymakers to keep options open on interest rates amid geopolitical risks, with the central bank holding its key rate at 6.75% for the past two meetings. The next rate decision is scheduled for May 28.
Moody's maintains its real GDP growth forecast of 0.5% in 2024, rising to approximately 2% by 2028, driven by stronger investment and steady consumer spending. If reforms in electricity, logistics, and water sectors are sustained, growth could exceed 2% over the medium term. Politically, the 2027-2029 election cycle poses a test for reform continuity, but Moody's expects the Government of National Unity to complete its full term with minimal policy disruption. South Africa's municipal elections are set for November 4.
While Moody's acknowledges a plausible path to debt stabilization, it stresses that faster progress hinges on stronger growth, consistent reform implementation, and the potential for tighter monetary policy in response to the oil shock. The agency warns that without these factors, South Africa's debt dynamics could remain vulnerable.
