S&P surprises with positive outlook for SA

In this podcast, STANLIB’s Chief Economist, Kevin Lings, examines the reasons why S&P decided to revise SA’s credit rating from BB- to BB, while Fitch kept its rating unchanged. SA’s weak GDP growth rate remains a concern for all credit rating agencies but while S&P took a more positive view, Fitch wants to see that growth significantly higher. Kevin also discusses how markets have reacted to recent positive developments.

The focus areas during the week included

• The S&P 500 index recorded a very modest gain of only 0.1%. This follows a decline of 1.6% in the previous week. Year-to-date the US equity market is up 14.5% but is down 2.3% from the record high of 28 October 2025. It has been hurt by concerns about elevated valuations and increased scrutiny of spending on AI.

• In contrast, the STOXX Europe 600 Index was up 1.8%, helped by the reopening of the US federal government and global equity market repositioning. The South African equity market also had a robust week, gaining an impressive 2.9%, which was driven largely by a 5.7% increase in the Resource 20 equity index. In Japan, the Nikkei 225 Index gained a modest 0.2% while the broader TOPIX Index was up 1.9%. Sentiment in Japan was supported by the ending of the longest US government shutdown in history. Conversely, continued concerns about overstretched valuations of companies with revenue streams linked to AI weighed on Japan’s technology sector.

• International equities (including SA’s) have delivered a strong performance in 2025. The MSCI AC World ex-US Index is on track for a gain of over 30% in US dollar terms – which will be the best annual return since 2009, if sustained. European markets have contributed meaningfully, supported by some renewed economic momentum from the European Central Bank’s (ECB) rate-cutting cycle and Germany’s recent fiscal stimulus announcement. Tech-heavy regions in emerging markets have also driven gains, with the MSCI China Index up roughly 40% and the MSCI Korea Index surging over 90%. The weaker US dollar has boosted international returns.

• Month-to-date, the rand has gained 1.4% against the US dollar, compared with the gain of 0.6% in the emerging market currency index. This gap reflects the systematic improvement in SA’s economic fundamentals, which was endorsed by S&P’s decision to upgrade SA’s credit rating status on Friday. A lower country risk premium, together with a lower inflation target, should provide some support and stability for the rand. Year-to-date, the rand has gained 9.9% against the dollar, while the emerging market currency index has gained 8.5%.

• There have been several hawkish comments from Federal Reserve (Fed) policymakers. For example, on Wednesday, Atlanta Fed President Raphael Bostic said he considered “signals from the labor market as ambiguous and difficult to interpret” and believed that they are “not clear enough to warrant an aggressive monetary policy response when weighed against the more straightforward risk of ongoing inflationary pressures”. He argued that current monetary policy is “marginally restrictive” and favours keeping interest rates steady “until we see clear evidence that inflation is again moving meaningfully toward” the central bank’s 2% target. St Louis Fed President Alberto Musalem said he believes policymakers “need to proceed and tread with caution,” while Cleveland Fed President Beth Hammack said that monetary policy needs to “remain somewhat restrictive” due to concerns about persistently high inflation. The probability of a rate cut at the Fed’s December Federal Open Market Committee meeting declined to around 46% on Friday afternoon, down from about 67% the prior Friday and close to 95% a month ago.

• On Wednesday, US Congress passed a budget agreement, signed by President Trump, ending the government shutdown after 43 days, the longest in US history. The spending package will fund the government until the end of January 2026 and provide retroactive pay for furloughed federal workers. The deal also provided for the funding of some government agencies for the full fiscal year (to October 2026). The S&P 500 rose slightly during the shutdown, and bond yields were range bound. The absence of economic data will not be resolved immediately. A White House representative said that the October jobs and inflation reports may never be released, while the Bureau of Labor Statistics (BLS) noted that “it may take time to fully assess the situation” and provide data release dates. Effectively, data quality for the months affected by the shutdown is likely to be much lower than normal, as statisticians will be forced to partially impute these figures based on alternative data or typical seasonal patterns. On Friday afternoon, the BLS announced that it will release its September jobs report on Thursday, 20 November.

• The US Congressional Budget Office estimates that the six-week shutdown will drive fourth-quarter real GDP growth 1.5 percentage points lower on an annualised basis than if there had been no shutdown. However, most of the shutdown-driven drag on economic performance should reverse up to the end of 2025 and into early 2026, signalling that the shutdown created a disruption rather than a destruction of economic growth.

• SA’s Medium-Term Budget Policy Statement (MTBPS), presented by the minister of finance on Wednesday afternoon, reiterated government’s commitment to fiscal consolidation. However, a meaningful and sustained improvement in economic growth and job creation remains elusive. The Minister revised down the government’s 2025 GDP forecast from 1.4% to 1.2%, largely because National Treasury was too optimistic at the beginning of the year. It did not fully take into account the negative impact of ongoing logistical constraints; heightened political uncertainty; weak consumer, business, and investor confidence; and ongoing global trade tensions. Positively, Treasury’s growth estimates for the next three years are a little more encouraging, with the economy expected to grow by 1.5% in 2026, before rising to 2% by 2028. While these growth estimates appear realistic and achievable, they highlight the lack of vibrancy in the economy. Importantly, the minister of finance reiterated the importance of significantly increasing the extent to which the private sector is involved in funding infrastructure and providing technical expertise. This is to be applauded, given the challenging economic, social, and political environment, but it will be difficult to achieve without the necessary political backing and support.

• For the 2025/26 fiscal year, the South African government expects to collect R2.01 trillion in tax revenue, which is a modest but welcome R19.7 billion more than the budgeted tax revenue estimate presented in the May 2025 National Budget. This is the first time that government has had a tax overrun since 2022/23 and it is largely in line with what was expected, given upbeat monthly tax revenue collection since April. The tax revenue-to-GDP ratio is expected to rise from 25.2% to 25.7%.

• According to the MTBPS, government’s budgeted non-interest expenditure will increase by R15.8 billion compared to the estimate presented in the May 2025 Budget. This is largely due to additional allocations to the provincial equitable share for spending on education, health, and the impact of population changes. The contingency reserve was increased to account for two freight rail rehabilitation projects in Transnet; capitalisation of the credit guarantee vehicle (for infrastructure projects); rebuilding Parliament; Sentech dual illumination costs; and the 2026 municipal elections. The government did not propose any additional allocations to SOEs. This is encouraging as it shows National Treasury continues to take a hardline approach towards SOEs, insisting that they restructure before additional funds are allocated. However, many SOEs remain in serious financial difficulty and will need government assistance sooner or later.

• Solid revenue collection and currency strength enabled the minister of finance to present an ongoing improvement in SA’s key fiscal parameters. National Treasury is now projecting a budget deficit for 2025/26 of 4.7% of GDP, which is down marginally from 4.8% in the May 2025 Budget. Gross government debt has been revised down modestly by R20.5 billion in 2025/26 relative to the 2025 Budget. The reduction in debt is more pronounced over the medium term, with National Treasury reducing its total borrowing requirement expectations by a substantial R56.5 billion in 2026/27 relative to the 2025 Budget Review, partly because government received an additional R31 billion from the GFECRA account in that year. Despite this, the country’s debt-to-DGP ratio was revised up to 77.9% of GDP from 77.4% for 2025/26, because of lower nominal GDP due to lower inflation. Overall, however, government maintains its commitment to debt stabilisation, with the ratio still peaking this year and trending lower in subsequent years.

• The minister of finance announced that National Treasury has officially changed the inflation target from the 3% to 6% target band to a point target of 3%, with a 1% tolerance band on either side. This is a positive development for macroeconomic policy as it puts SA’s monetary policy in line with its trading partners. If achieved, lower inflation will support household consumption and private investment due to higher purchasing power, a lower cost of capital, and a less volatile and better-performing exchange rate.

• S&P decided to upgrade SA’s international credit rating from BB- to BB. It kept SA on a positive outlook. This is the first time in twenty years that S&P has upgraded the credit rating. Despite the upgrade, SA remains two notches below investment grade. S&P highlighted the following four key positives:
  • The tax revenue over-run of R19.7 billion announced by the minister of finance in the MTBPS;
  • The third successive year that the government has maintained a primary surplus;
  • Improving tax collections and expenditure constraints are expected to result in further fiscal consolidation up to fiscal 2028;
  • Contingent liabilities are expected to ease as SOEs are likely to require less financial support in future.

• S&P highlighted SA’s low GDP growth of 1.1% (expected by S&P) in 2025, as well as its expectation that growth will average only 1.5% from 2026 to 2028. This is (according to S&P and many others) insufficient to “raise living standards or lower unemployment”. This was not enough of a concern to stop the rating upgrade (as opposed to Fitch’s recent assessment of SA’s credit rating). S&P said that SA’s growth rate could surprise on the upside if the current policy reforms accelerate.

• According to Stats SA, in the third quarter of 2025 SA’s employment increased by 248 000 jobs and has risen by 109 000 jobs over the past year. This pushed SA’s official unemployment rate down from 33.2% in Q2 2025 to 31.9% in Q3 2025. Importantly, Stats SA has incorporated a range of updated global standards relating to the measurement of employment, notably the measurement of informal vs formal sector employment. This means that the latest estimate of informal sector employment (3.961 million people) is no longer comparable with previous estimates. Interestingly, the change to the definition of informal sector employment did not boost the level of employment to the extent many people assumed. Stats SA has also significantly expanded the range of indicators relating to the underutilisation of labour, including “time-related underemployment”. You must work only one hour a week to be regarded as employed.

• The latest batch of economic data from China (retail sales, industrial production and fixed asset investment) suggests that the Chinese economy lost steam as it entered the final quarter of the year. For example, fixed asset investment declined by 1.7% in the first 10 months of the year, a record drop for the period. Industrial production rose by a weaker-than-expected 4.9% y/y in October (compared with 6.5% y/y in September), while retail sales increased by 2.9% y/y (down from 3% y/y in September). Although China’s economy weakened more than expected, most economists (including ourselves) believe that Beijing’s official growth target of about 5% this year is still manageable, particularly after the US and China struck a one-year trade truce at talks in South Korea last month. Moreover, the central government has approved stimulus measures totaling RMB 1 trillion since the end of September 2025 to boost capital expenditure.

• In October 2025 China’s housing market, which is in its fourth year of noticeably subdued activity, remained under pressure. New home prices in 70 cities fell by a combined 0.5% m/m in October, the steepest decline in a year, while existing home values fell 0.7% m/m – the biggest drop in 13 months. The ongoing malaise in China’s property market has been a major growth headwind, making consumers reluctant to spend and worsening the deflationary cycle that has plagued the Chinese economy since early 2023.

• After dropping by 1.1% m/m in August, industrial production in the Eurozone increased by 0.2% m/m in September. This was, however, well below the 0.9% m/m consensus forecast. In November, investor sentiment in Germany fell unexpectedly, according to the ZEW economic research institute. ZEW President Achim Wambach said: “the overall mood is characterized by a fall in confidence in the capacity of Germany’s economic policy to tackle the pressing issues”.

• The November Tankan survey showed that confidence among Japan’s manufacturers rose to its highest level in nearly four years. The poll indicated that the manufacturers’ sentiment index increased to +17, from October’s +8. Exporters, particularly those in the electronics and vehicle sectors, benefited from the boost to demand from the weak yen.