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South Africa has secured its first credit upgrade in two decades after S&P Global Ratings lifted the country’s sovereign ratings by one notch to BB on the back of reforms and growing fiscal revenue. 

The agency upgraded its foreign currency sovereign credit rating for Africa’s most industrialised nation to BB from BB- on Friday, two notches below investment grade. The local currency rating also increased a notch to BB+.

S&P said it had a positive outlook given the “potential for further improvements in fiscal metrics and government debt stabilisation” after a medium-term budget update this week signalled that government debt was coming under control.

The improvement underlines a turnaround under President Cyril Ramaphosa’s government from constant rolling power blackouts and crisis in his African National Congress just a few years ago to structural reforms and the advent of coalition government.

It will also raise hopes of upgrades by other rating agencies and the eventual restoration of South Africa’s investment-grade status half a decade after it was junked.

S&P junked South Africa’s rating in 2017 in the depths of misrule under Jacob Zuma, which cast a long shadow over the economy. South Africa lost its last investment-grade rating, from Moody’s, in 2020.

“The outlook also reflects the possibility of stronger growth than we currently expect, despite trade and tariff-related headwinds,” S&P said.

The rolling blackouts that hamstrung the economy have largely been avoided this year and Eskom, the state power company, returned to profit after eight years of losses and reliance on government bailouts.

“We’ve been in decline for the last 10 years, so this possibly signifies a turning point,” said Asief Mohamed, chief investment officer of Cape Town-based Aeon Investment Management.

But high levels of crime as well as corruption in both the private and government sectors remain a concern, he added.

S&P said the upgrade reflected South Africa’s recent record of budget surpluses, excluding interest payments, and less financial pressure from Eskom.

However, South Africa’s government debt is set to fall only gradually to 75 per cent as a share of GDP by 2028, and debt interest will average nearly a fifth of revenues in the next three years, S&P added.

After a decade in which GDP expansion remained below 1 per cent, there have been other positive developments.

The country was recently removed from the Financial Action Task Force’s grey list while the survival of the government of national unity has improved investor confidence.

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This week, the government cut its inflation target for the first time this century to 3 per cent, bolstering a rand rally.

Speaking during his half-year budget update on Wednesday, finance minister Enoch Godongwana said the lower target would support “household spending and business investment, boosting economic growth and job creation”.

S&P said it expected South Africa’s GDP growth to pick up to 1.1 per cent this year, from 0.5 per cent in 2024.

South African assets have stood out this year even in the midst of a rally in other emerging markets, while the rand is up about a tenth against the dollar in spot terms. The Johannesburg all-share index has risen about a third this year, or nearly 50 per cent in dollar terms.

The yield on South Africa’s 10-year rand government debt has fallen from 11 per cent in April to about 8.7 per cent.