South Africa's improving fiscal performance and reform momentum should help government debt stabilise this year before gradually declining, Moody's Ratings said in a report dated Wednesday.

Moody's said stronger revenue, spending restraint and improving funding costs supported the credit-positive shift, though debt above 80% of GDP continued to limit the government's ability to absorb shocks. Moody's rates South Africa at Ba2 with a stable outlook.

Moody's forecast South Africa's general government deficit would narrow to 4.3% of GDP in 2026 and 3.8% in 2027, from 4.5% in 2025.

Primary surplus is expected to rise to 1.8% of GDP in 2027, above its estimated 1.5% level needed to stabilise debt.

General government debt is estimated to have peaked at 86.8% of GDP in 2025 and is forecast to decline gradually to 84.9% by 2028, Moody's said.

Interest payments accounted for 18.8% of general government revenue in 2025, which Moody's said was weaker than many similarly rated peers.

Moody's said South Africa's shift to a lower inflation target of 3%, with a 1 percentage point tolerance band, should help lower risk premia and funding costs.

The ratings agency expects real GDP growth to rise gradually to around 2% by 2028 from 0.5% in 2024, supported by higher investment and resilient consumption.

It said sustained reforms in electricity, logistics and water sectors could lift medium-term growth potential above 2% and help attract private investment.

The ratings agency said the 2027-2029 electoral cycle would test reform durability, but the risk of a sharp policy reversal was limited.

Moody's said its baseline was for the Government of National Unity to hold through its term, with the African National Congress and Democratic Alliance wanting to preserve stability before the 2029 general election.