PRETORIA, May 15 – Morgan Stanley said on Friday that South Africa’s longer-term reform trajectory remains intact despite mounting pressure from rising global oil prices linked to the conflict in the Middle East.
Economists at the U.S. lender said South Africa entered 2026 with improving economic fundamentals, including lower borrowing costs, fiscal consolidation and stronger prospects for sovereign credit-rating upgrades. However, the surge in energy prices has prompted the bank to lower its 2026 economic growth forecast to 1.2% from 1.7%.
The bank said higher fuel costs are expected to weigh on household spending, corporate profitability and investment activity in the coming quarters.
Despite the downgrade to growth expectations, Morgan Stanley maintained a constructive medium-term outlook on the economy, arguing that structural reforms and macroeconomic improvements should regain momentum in 2027 if oil prices stabilize.
The lender said fiscal consolidation efforts remain broadly on track, supported by spending restraint and improved nominal revenue collection. It added that South Africa’s debt-to-GDP ratio likely peaked in the fiscal year ended March 2026, while the consolidated budget deficit is expected to gradually move toward 3% over the coming years.
Morgan Stanley also warned that the oil shock is likely to push inflation above the South African Reserve Bank’s 3% inflation target, which was adopted last year with a one percentage point tolerance band.
The bank said it still expects the central bank to raise interest rates by 25 basis points at both its June and July meetings in an effort to anchor inflation expectations and preserve policy credibility.
However, the tightening cycle may prove temporary if persistently high oil prices trigger a broader economic slowdown, potentially allowing policymakers to resume interest-rate cuts through 2027.
Morgan Stanley said South Africa’s vulnerabilities are more likely to appear through pressure on the rand and the country’s external accounts rather than through worsening fiscal conditions or a selloff in government bonds.
“The result is more observable pressure on the external account rather than the fiscal balance, which should show up in currency weakness rather than higher bond yields,” the bank said in the note.
The lender also flagged South Africa’s municipal elections scheduled for Nov. 4 as a key political risk event for investors, particularly regarding the stability of the country’s coalition government and the future leadership of the ruling African National Congress.
The comments come shortly after South Africa’s Constitutional Court ruled that parliament must proceed with an impeachment inquiry into President Cyril Ramaphosa, intensifying political scrutiny at a time when investors are closely monitoring the durability of the country’s reform agenda.
