Moody’s and Fitch see South Africa’s debt burden outpacing Budget forecasts

Credit ratings agencies have warned that South Africa’s national government debt will stabilise higher in relation to gross domestic product (GDP) than anticipated by the National Treasury during the 2025 Budget tabled last week. 

This comes as the gross government debt is projected to reach R5.69 trillion or 76.1% of gross domestic product (GDP) this year.

Finance Minister Enoch Godongwana last week forecast that the debt ratio will peak in the coming fiscal year, before gradually declining from fiscal 2026-27 given primary surpluses.

Godongwana said the government projected that gross debt-to-GDP will stabilise at 76.2% of GDP in the 2025 fiscal year, compared with 76.1% in 2024, before declining gradually thereafter.

The budget forecasts the fiscal deficit will fall to 3.5% of GDP by fiscal 2027/28, a slight worsening compared to the 3.2% forecast in last October's medium-term budget policy statement (MTBPS).

However, Moody’s Investor Services on Tuesday said this compared with an estimated deficit of 5% of GDP in fiscal 2024/25, which is unchanged as higher than budgeted spending in the last fiscal year will be met with higher than expected revenue. 

“Our forecasts are similar: we expect the fiscal deficit to gradually decline and general government debt, which since 2019 includes most government guarantees provided to state-owned enterprises (SOE), to stabilise at around 80% of GDP,” Moody’s said.

On Friday, Fitch Ratings also said the government’s debt projections were more optimistic than the latest assumption that debt will reach 78.8% of GDP in 2025, from 77% in 2024, and will continue to increase in 2026. 

Fitch said it could be positive for the sovereign’s rating if debt followed the path projected by the government.

“The divergence in debt projections over FY24-FY25 partly reflects our assumption that the government will take debt from the state-owned logistics company, Transnet, worth 0.7 percentage points of GDP, though the budget’s increase in infrastructure spending may reduce the likelihood of such a transfer,” Fitch said. 

“Excluding this, and incorporating the announced revision of Eskom’s debt transfer, our debt/GDP forecast would be 76.6% in FY24 and 77.8% in FY25. The remaining difference comes from our lower projections for the primary surplus and nominal GDP.”

Meanwhile, Moody’s said there were risks the the adoption of the Budget could be delayed further because it still lacks the support of the second-largest party in the Government of National Unity (GNU). 

The Democratic Alliance (DA) said that it would not support the budget as tabled over the proposal to increase the value-added tax (VAT), despite the government moderating the VAT increase to 0.5% for 2025 and 2026, respectively. 

Moody’s said this suggested continuing policy disputes in the GNU, making building consensus within the coalition harder.

It said these political disputes will also complicate efforts to find new funding sources to address rising social spending pressures in coming years while growth remains low.

“However, the tabled budget shows a gradually improving fiscal trajectory, notwithstanding a marginal deterioration relative to the last budget plan. Continued friction within the GNU means there may still be some changes to fiscal measures before parliament approves the budget, but we expect the budget's overall focus on fiscal consolidation to remain,” Moody’s said.

“Our baseline assumptions for the GNU factor in frictions in the budget process. The DA has said that it is open to further negotiations before budget instruments are voted on from 2 April. This creates uncertainty around which policy measures parliament will approve, although the focus on fiscal consolidation, with debt peaking in fiscal 2025/26, is unlikely to change. Our baseline is for the GNU to reach a compromise, leading to an orderly approval of the budget.”

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