Africa-Press – South-Africa. Credit rating agency Moody’s has warned that South Africa risks a negative spiral where high interest rates and subdued economic growth limit domestic investment and further harm the country’s economy.
In particular, Moody’s sounded the alarm about South Africa’s high debt service costs, which cost the government R1.2 billion a day.
These comments were made in Moody’s recent report on emerging markets in Africa, which focused on the credit risks of South Africa, Kenya, and Nigeria.
The report said that all three countries have substantial funding needs for development, but a combination of structural weaknesses keeps borrowing costs high and will take time to address.
The agency explained that borrowing costs are high across all three countries, although South Africa’s debt costs are lower than those of the other two.
This is because South Africa boasts deeper domestic capital markets and a credible monetary policy framework under the Reserve Bank.
However, it pointed out that South Africa’s debt service costs are still higher than in many major emerging markets.
Moody’s attributed this to the country’s economic and fiscal constraints, warning that, if this is not addressed, the country risks a negative spiral.
“Without improvements, South Africa risks continuing a negative spiral in which high interest rates aimed at attracting inflows amid subdued growth limit domestic investment and further hinder economic prospects,” the agency warned.
While the South African Reserve Bank (SARB) is currently in a cutting cycle, with 125 basis points of cuts delivered so far, the country’s interest rates remain relatively high.
Moody’s data showed that long-term rates in South Africa are higher than those in most emerging market economies, with the exception of Mexico and Brazil.
Nedbank chief economist Nicky Weimar previously pointed out that, even though South Africa’s inflation is the lowest it has been in years in recent months, the Reserve Bank has kept interest rates at decade-highs. This can be seen in the graph below.
South Africa has a growth problem
Reserve Bank governor Lesetja Kganyago has previously explained that the country’s heightened risk premium is one of the biggest drivers of elevated interest rates in South Africa.
This heightened premium has been created by over a decade of mismanagement of the state’s finances, including the government’s high debt and, consequently, high borrowing costs.
Relative to the country’s GDP, debt has grown every single year since 2008, when the state last ran a full budget surplus.
This has resulted in one of the fastest debt increases of any country in recent history. Compared to its peer group, South Africa also has one of the highest debt levels on record.
Kganyago explained that this risk makes the country’s assets relatively less attractive to investors, weakening the currency and potentially driving inflation higher.
This heightened risk premium requires the Reserve Bank to compensate by protecting the rand’s value and ensuring price stability through higher interest rates.
“If there were widespread confidence that debt levels were heading lower, this would create space for monetary policy to support growth through lower interest rates,” Kganyago said.
“All the drivers point in the same direction: credible fiscal consolidation would lower country risk. Improved investor confidence would also help the rand, which eases inflation.”
The National Treasury plans to do exactly this and stabilise the government’s debt by running primary budget surpluses.
This will allow the government to chip away at its debt, lowering borrowing costs and, in doing so, direct funds to more productive areas of the economy.
However, credit rating agency Fitch recently expressed some doubt about the government’s ability to stabilise its debt.
In fact, the agency predicted that South Africa’s debt would reach nearly 80% in the 2027 fiscal year.
Fitch projected that South Africa’s debt-to-GDP ratio will continue to grow over the next three years, to 78.5% in FY25, 79% in FY26 and 79.6% in FY27.
The agency attributed this to the government’s exposure to public institutions like Transnet, independent power producers, and public-private partnerships of R674.9 billion in March 2025.
“We expect contingent liabilities to continue to rise, given state freight transport and logistics company Transnet’s reliance on guarantees from the sovereign,” the agency said.
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