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Moody’s is set to review South Africa’s sovereign credit rating on Friday in what could become an important signal to investors about the country’s fiscal direction and economic credibility.

Credit ratings are assessments issued by ratings agencies such as Moody's and S&P Global that measure how risky it is to lend money to governments. The ratings influence how much countries pay to borrow on international markets. A stronger rating generally lowers borrowing costs, attracts investment, and signals greater confidence in a government’s finances. A weaker rating has the opposite effect, often pushing up interest rates and discouraging capital inflows.

Moody’s sovereign ratings scale ranges from Aaa at the top, which represents the lowest possible credit risk, down through Aa, A, and Baa categories, which are still considered investment grade. Below that are further categories of Ba, B , Caa, Ca, and C, all of which are below investment grade.

Within each category, Moody’s applies numerical modifiers from 1 to 3, with 1 being the strongest and 3 the weakest. Ratings are then further described as negative, stable, or positive. Countries below Baa3 fall into speculative or “junk” territory, where borrowing is considered materially riskier. South Africa is currently rated Ba2 by Moody's, which is two notches below investment grade. A move from a stable to a positive outlook would not immediately change South Africa’s rating itself, but would indicate that Moody’s believes the probability of a future upgrade has increased if fiscal and economic conditions continue improving.

South Africa lost its final investment-grade credit rating in 2020 after years of weak growth, rising debt, Eskom-related fiscal pressures, and deteriorating state finances. Since then, the country has remained in sub-investment-grade territory, commonly referred to as “junk status”.

Mahlobo says conditions may now have improved sufficiently for Moody’s to acknowledge a strengthening fiscal trajectory.

Moody’s previously indicated that South Africa’s debt burden is expected to stabilise this year. The agency expects the budget deficit to narrow from 4.5% of GDP in 2025 to 4.3% in 2026 and 3.8% in 2027. That matters because sustained deficit reduction slows the pace at which government debt accumulates.

According to National Treasury projections, debt is now expected to stabilise below 80.0% of GDP rather than continue to rise indefinitely. That is a meaningful shift compared to earlier fears that debt levels could enter an uncontrolled upward spiral.

Another factor supporting South Africa’s position is the National Treasury’s maintenance of a primary budget surplus. A primary surplus means the government is collecting more revenue than it spends before interest payments on debt are included. Ratings agencies view this as an important sign of fiscal discipline because it suggests the state is no longer borrowing simply to fund day-to-day operations.

The rand has also strengthened by around 8% over the past year.

Mahlobo argues that Moody’s therefore has room to recognise improved fiscal credibility without yet committing to a full ratings upgrade. He notes that S&P Global has already moved in this direction.

However, he warns that while his expectation is for an outlook upgrade, “South Africa still faces structurally weak growth, high unemployment, infrastructure constraints, and rising pressure on public spending. And its government has not moved with the requisite firmness to drive reforms to change any of that. Any deterioration in global conditions, oil prices, political stability, or state finances could quickly reverse fiscal gains.”

Mahlobo continued, “The agency will likely be factoring in concerns around the Iran war, the outlook for global interest rates, and the fiscal pressure created by the South African government giving motorists a partial pass on fuel taxes.”

He also cautions that a positive outlook would not immediately improve South Africa’s rating itself. Instead, it would indicate that Moody’s believes the balance of risks is shifting in a better direction over the medium term. Markets often treat such moves as early signals that a future upgrade could become possible if fiscal consolidation continues and economic stability is maintained.

For now, though, Friday’s review will be a useful signal of whether ratings agencies believe South Africa’s public finances are no longer deteriorating at the pace seen during the previous decade.