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It was not supposed to go like this. After a genuinely positive 2025, South Africa entered the new year with improved fiscal metrics, a stronger credit standing, and financial markets that had rewarded the country's growing credibility. Then came the US and Israeli strikes on Iran, the closure of the Strait of Hormuz, and a sharp spike in global oil prices that left investors reassessing the outlook for commodity-dependent emerging markets.
Yet here is the surprising thing: South Africa is holding up better than almost anyone anticipated. And the Moody's decision at the end of May to revise the country's credit outlook from stable to positive, in the middle of this external shock, says something important about where South Africa actually stands.
To understand why Moody's acted now, it helps to recall where we have come from. South Africa fell into sub-investment grade in 2020, when Moody's became the last major rating agency to make that downgrade. What followed was a slow, disciplined process of fiscal repair: conservative budgets, meaningful spending constraint, and a commitment to reducing the debt-to-GDP trajectory. That work has been recognised. Earlier this year, S&P upgraded South Africa's rating to two notches below investment grade and retained a positive outlook, putting it on the same footing as Moody's at double-B flat. Moody's latest move is an acknowledgement of that same steadfast commitment to fiscal consolidation.
The numbers back it up. South Africa has now posted a primary surplus for three consecutive years, which means that, excluding interest costs, government is spending less than it collects in revenue. The main budget deficit came in at 4.3% last year, better than the 4.6% the National Treasury had projected. And in April, the first month of the new fiscal year, tax revenues came in R5.9 billion higher than forecast. These are not trivial outcomes. They reflect a level of fiscal discipline that has, in our view, been underappreciated by markets.
The monetary picture is similarly constructive, though the Strait of Hormuz closure has complicated the path. The South African Reserve Bank entered this period of uncertainty in a position of relative strength: the repo rate was sitting at around 6.75%, a meaningful positive real interest rate, and inflation expectations had been well anchored. The BER Q1 2026 Inflation Expectations Survey showed the two-year-out forecast at just 3.6%, a clear affirmation of the Reserve Bank's credibility. That credibility gave the Bank room to skip a rate hike at the March MPC meeting despite the fog of uncertainty around oil prices.
That room has since narrowed. The initial hope that the Strait might reopen quickly has faded, and the disruption is looking more extended than markets priced in. Oil infrastructure damage and depleted inventories mean elevated energy prices are likely to persist. The Reserve Bank hiked by 25 basis points at the most recent MPC meeting and may do so again, specifically to prevent second-round inflationary effects from feeding through into the broader basket.
Food inflation adds another layer of risk. Fertilizer shortages and diesel-driven supply chain costs are already beginning to show up in food prices, and the possible formation of an El Niño weather system raises the spectre of drought conditions next year. These are real concerns, and the Reserve Bank has them firmly in its sights.
What has surprised many observers is the resilience of the rand. South Africa's export commodity basket has done a great deal of heavy lifting here. Coal prices are well above historical averages. Gold has benefited from central bank diversification away from dollar exposure, a trend that may have more medium-term durability than cyclical commodity moves typically do. Platinum and palladium have also seen notable gains. The net result is that South Africa's terms of trade have acted as a meaningful buffer, keeping the currency far more stable than the scale of the energy disruption might have suggested.
The central question is how long this holds. If oil remains in the $90 to $100 per barrel range, or moves higher, when does it become a serious structural problem? The honest answer is that economies are more dynamic than simple models suggest. What has prevented oil from spiking to the $150 to $200 range that many analysts would have predicted for a prolonged Strait closure is a combination of aggressive inventory drawdowns and significant demand destruction, particularly from China, which now imports roughly five million barrels per day less than it once did.
For South Africa, a similar dynamic would likely play out through the growth outlook rather than through a fiscal or currency crisis. The more important question is whether fiscal policy remains committed to the debt trajectory, even under pressure. In our view, the answer is yes, and the rating agencies appear to agree. That the Moody's outlook upgrade came in the middle of a major external shock is, at minimum, a signal that the structural progress is being noticed beyond our borders.
South Africa is not immune to what is happening in global energy markets. But it is better placed than it has been in years to absorb the pressure.
