Fitch affirms South Africa's sub-investment credit rating amid economic challenges

Fitch Ratings has affirmed South Africa’s long-term foreign-currency issuer default rating at ‘BB-’ with a stable outlook, citing weak economic growth prospects, rising government debt and high poverty and inequality as the country’s main credit constraints.

In its latest review published on Friday, the ratings agency said South Africa's sub-investment rating was also constrained by the rising government debt/GDP ratio and a rigid fiscal structure that hampers budget deficit reduction.

South Africa slipped further into below investment grade in 2020, with foreign currency ratings reaching a bottom of BB- under Fitch.

However, Fitch said the ratings were supported by a favourable government debt structure with long maturities and mostly local-currency-denominated, strong institutions and a credible monetary policy framework.

Fitch is projecting that South Africa’s economy would expand by only 1.2% annually between 2025 and 2027, well below the 3.7% median growth forecast for peers in the same ratings category.

While electricity reforms have reduced load shedding and helped stabilise freight volumes, Fitch said structural challenges — including low investment, unemployment and entrenched inequality — continue to weigh on growth.

"Growth is hampered by a slowly recovering logistics sector, weak investment, uncertainty over external trade relations and deeply entrenched structural factors, particularly high levels of inequality, poverty and unemployment," said the agency.

On the fiscal front, Fitch expects the consolidated budget deficit to narrow slightly to 4.4% of GDP in 2026 and 4.3% in 2027, aided by tighter spending on wages, improved tax compliance and reduced support for state-owned enterprises.

However, Fitch noted that debt levels remained a key concern. Government debt rose to 78.1% of GDP in 2024 and is forecast to climb further, reaching nearly 80% by 2027, far above the peer median of 54%.

The agency warned that fiscal flexibility was hampered by a rigid expenditure structure, with wages and interest payments consuming almost half of government spending.

Fitch said Transnet remained a significant risk to the fiscus, with continued financial losses and reliance on government guarantees. South Africa’s contingent liabilities stood at more than R600 billion, or 9.1% of GDP, by March 2025.

"South Africa's contingent liabilities remain high, with government guarantee exposure to public institutions, independent power producers and public-private partnerships of R674.9 billion in March 2025," it said.

"We expect contingent liabilities to continue to rise, given state freight transport and logistics company Transnet's reliance on guarantees from the sovereign." 

Fitch said Transnet remains hampered by maintenance backlogs, rolling stock shortages, theft, vandalism and years of mismanagement.

Under the 18-month recovery plan announced in October 2023, rail and container volume rose to 160 million tons in the 2024 financial year from 152 million tons in 2023 financial year, but fell short of the 170 million tons target.

On a positive note, Fitch pointed to South Africa’s favourable debt structure, with long maturities and a low share of foreign-currency borrowing, as well as resilient financing conditions underpinned by a deep domestic investor base and liquid rand markets.

Inflation is expected to remain under control, rising modestly to 4.2% by end-2025 before easing in subsequent years. The current account deficit is projected at less than 1% of GDP this year, supported by higher gold exports.

Politically, Fitch noted that the Government of National Unity (GNU) has held together despite earlier tensions, maintaining consensus on economic priorities. The agency does not expect major political instability before the 2027 municipal elections, though it cautioned that coalition relations remained fluid.

"Relations are fluid between and within the main parties and municipal elections, which have to be held by early 2027, will pose a test, given the likely close contests between the main constituent parties, in Fitch's view," it said.

Meanwhile, the National Treasury said the government’s economic growth strategy will continue to focus on maintaining macroeconomic stability to reduce living costs and grow investment, executing reforms to promote a more dynamic economy, building state capability in core functions and supporting growth-enhancing public infrastructure investment.

"Over the medium term, government will invest over R1 trillion in infrastructure, and reforms will make it easier for the state and the private sector to invest in roads, rail, energy and water," Treasury said.

"Additionally, major reforms to state spending and the budget process are under way including the implementation of targeted and responsible savings across government. Further details will be provided in the Medium-Term Budget Policy Statement on 12 November 2025." 

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