The forces reshaping South Africa's credit market

The first half of 2026 marked an important period of transition for South Africa's debt capital market (DCM). Improved sovereign ratings momentum, the accelerating shift from JIBAR to ZARONIA, and the rapid emergence of the Financial Loss-Absorbing Capacity (FLAC) market reshaped local credit conditions and supported strong market activity. Yet alongside this increasingly constructive backdrop, governance risk within parts of the public sector remained a key area of focus for investors.

A more constructive sovereign backdrop

The sovereign ratings environment was one of the defining themes of the period. S&P affirmed South Africa at BB with a positive outlook, Moody’s revised its outlook to positive Ba2, and Fitch upgraded the sovereign by one notch to BB with a stable outlook. The common thread across these actions was recognition of improving fiscal management, primary budget surpluses, better revenue collection, expenditure discipline, continued reform momentum, and a greater degree of policy certainty under the Government of National Unity.

This does not mean South Africa has resolved its structural constraints. Growth remains weak, unemployment remains high and the country is still below investment grade. But the country’s credit story is moving in a more positive direction than before. For credit investors, the sovereign is no longer only a source of pressure; it is beginning to provide a more supportive anchor for the broader domestic credit market.

The improved sovereign tone also had a knock-on effect across banks, state-owned enterprises (SOEs), corporates and municipalities whose ratings are closely linked to the sovereign. Several issuers benefited from positive outlook revisions, although issuer-specific weaknesses continued to play a role. The rating story, in other words, became more constructive.

The exit of Moody's Ratings SA

Notwithstanding the constructive sovereign backdrop, the local ratings landscape experienced a notable shift.

Moody's Ratings SA withdrew its registration as a South African credit rating agency, becoming the second major ratings provider to exit the local market in the past decade.

At first glance, this appeared significant. However, the practical implications for investors are likely to be manageable.

Recognising the importance of ratings within regulatory frameworks, the Financial Sector Conduct Authority granted a 24-month transition period during which existing Moody's ratings may continue to be used for regulatory purposes. This provides market participants with time to adjust and reduces the risk of disruption.

The long-term consequence may be a market that relies more heavily on proprietary research and internal credit capabilities rather than one dominated by external opinions.

FLAC comes of age

Another significant development in South Africa's debt capital markets during the first half of 2026 was the rapid maturation of the FLAC market.

What was still regarded as a new regulatory funding instrument at the start of the year has, within the space of six months, become an established and increasingly important segment of the local credit market.

FLAC issuance reached R39.5 billion in H1 2026, making it one of the primary drivers of debt capital market activity during the period and reinforcing its role in how banks are preparing for evolving regulatory capital requirements.

Read: An evolution in SA’s banking resolution

Momentum accelerated notably during the second quarter. By June, five of South Africa's six major banks had become active FLAC issuers, with Investec joining Absa, FirstRand, Nedbank and Standard Bank in the market. June was particularly significant, as all five active issuers accessed investors during the month, contributing to a record R19.1 billion of monthly bank-sector issuance.

The pace of issuance reflects the scale of the funding task still ahead. Industry estimates suggest that South Africa's six major banks will ultimately need to raise between R295 billion and R300 billion of FLAC over the multi-year implementation period. Current issuance therefore represents only the early stages of a much larger structural funding programme that is expected to shape the debt capital market for years to come.

The market also continued to evolve in sophistication. H1 2026 saw the emergence of the first sustainability-linked FLAC transactions, including issuances supported by development finance institutions such as the African Development Bank.

These transactions broadened the investor base and demonstrated the market's ability to accommodate more diverse funding structures as the asset class matures.

Importantly, investor acceptance of FLAC has strengthened considerably. As issuance volumes have increased, the market has begun developing sufficient pricing history to establish a standalone FLAC spread curve across multiple maturities.

Source: Auction outcomes

This is a notable milestone. For many years, senior unsecured bank debt served as the primary benchmark for assessing relative value across the South African credit market. Increasingly, FLAC is beginning to occupy that role, giving investors a new reference point for pricing risk.

While demand remains robust, the market is also showing signs of maturing. Subscription levels and bidder participation have moderated from the exceptionally strong levels seen in the earliest transactions, reflecting growing investor awareness of the substantial pipeline of future issuance still to come. Even so, pricing continued to tighten through H1 2026, supported by strong institutional demand and a broader supply-demand imbalance across the domestic credit market.

More broadly, the rise of FLAC highlights the speed at which South Africa's debt capital market can adapt to regulatory change. Since Prudential Standard RA03 was finalised in December 2024, FLAC has evolved from a regulatory concept into a mainstream funding instrument, becoming part of bank funding strategies, attracting development finance participation and beginning to establish itself as a benchmark for credit pricing.

The end of JIBAR draws closer

Alongside the emergence of FLAC, another important structural change underway in the market is the transition from JIBAR to ZARONIA.

Read: JIBAR to ZARONIA: Top questions answered

For decades, JIBAR served as the primary benchmark reference rate for floating-rate debt instruments in South Africa. That era is now approaching its conclusion. The 'No New JIBAR' requirement took effect on 1 May 2026, meaning that new contracts are expected to reference ZARONIA rather than JIBAR. The benchmark itself will cease publication at the end of the year.

Beyond new issuance, market participants will also need to transition legacy JIBAR-linked notes to ZARONIA before JIBAR ceases publication on 31 December 2026. This represents a significant operational and documentation exercise as the transition enters its final phase.

Although benchmark transitions are inherently complex, the market has adapted efficiently. Issuers, investors and regulators have spent several years preparing for the change and activity during the first half of 2026 suggests that adoption is gaining momentum.

The significance extends beyond operational adjustments. Reference rates underpin the pricing of a vast range of financial instruments. A smooth transition is therefore critical to maintaining market confidence, preserving liquidity and ensuring continuity across debt markets.

The evidence so far suggests that South Africa's debt capital market is successfully navigating one of the most significant technical changes in its recent history.

Strong demand continues to drive the market

Despite a backdrop of geopolitical uncertainty, shifting benchmark conventions and significant regulatory change, issuers continued to find deep pools of demand from investors.

Gross issuance across bonds and commercial paper reached R102.3 billion in the first six months of the year, representing a 51% increase compared with H1 2025 and matching the elevated levels seen in the second half of last year.

Much of that activity was driven by the banking and financial sector, which raised R70.8 billion, making H1 2026 one of the strongest issuance periods for financial institutions in at least the past decade. The growth was fuelled largely by the continued rollout of FLAC issuance, but traditional capital instruments and subordinated debt also featured prominently as banks continued to optimise their funding structures.

June was a particularly strong month, with R26.1 billion issued across the market. The financial sector alone accounted for R18.8 billion, marking the strongest monthly issuance volume for financial issuers since at least 2017. The scale of activity highlights both the funding requirements of issuers and the willingness of investors to provide capital.

What is perhaps most notable is that demand consistently outpaced supply. Transactions were routinely oversubscribed, with subscription cover generally exceeding two times the amount on offer, while many issuers achieved pricing at or below their initial guidance levels.

The chart below illustrates the depth of investor demand across primary market transactions in H1 2026.

In an environment where global uncertainty remained elevated, these outcomes reflected a market characterised by abundant liquidity and strong appetite for quality credit exposure.

The corporate sector also benefited from these favourable conditions. Corporate issuance reached R23.3 billion during H1 2026, with activity broadening significantly as more issuers took advantage of attractive funding conditions.

The period saw successful market access by a diverse range of borrowers, including MTN, Growthpoint Properties, Netcare, Pepkor, Toyota South Africa and Life Healthcare. Valterra Platinum also made its debut in the debt capital market, raising R2 billion while attracting approximately R6 billion in investor bids, providing a strong indication of demand for well-positioned corporate credit.

Public sector improvements remain uneven

The public sector presented a very different picture. State-owned enterprise issuance remained subdued, with only R2.2 billion raised during the period and no government-guaranteed SOE debt issued.

The most significant event was not a new transaction but rather the maturity of Eskom's R38 billion ES26 bond in April, which was not refinanced through the domestic debt capital market as the utility continues to benefit from government debt-relief measures.

Additional support came through NERSA's approval of R54.7 billion in allowable revenue via its February tariff redetermination.

Transnet also made progress in diversifying its funding sources, securing an additional R5.8 billion in development finance institution funding during the first half of the year. This complemented the broader support framework put in place during 2025 and reduced the organisation's reliance on traditional debt capital market funding.

Yet despite these improvements, governance and fiscal sustainability remained key points of concern for credit investors.

Municipal finances continue to present one of the most significant risks within South Africa's public-sector credit landscape. Municipal arrears to Eskom increased to approximately R110 billion by December 2025, highlighting ongoing financial stress at local government level and the interconnected nature of public-sector credit risk.

The City of Johannesburg became the focal point of investor attention during the period. In March 2026, the JSE temporarily suspended trading in the City's listed debt after it failed to publish its FY25 audited financial statements within the required timeframe.

Although the City subsequently released its financial statements and successfully settled its R1.44 billion COJ08 bond at maturity in June, concerns remained around governance, transparency and financial sustainability. National Treasury publicly described the City's creditor position as a marker of severe financial distress and warned that its R10.3 billion wage agreement could place additional pressure on already constrained finances.

These challenges are not isolated.

Governance instability, delayed financial reporting, rising bulk-service arrears and infrastructure underinvestment continue to affect a number of municipalities, particularly coalition-led metros. During H1 2026, the City of Tshwane suspended its Chief Financial Officer, while several municipalities experienced changes to external credit rating coverage as rating agencies reassessed governance and financial risks.

For investors, this divergence between improving sovereign indicators and weaker municipal fundamentals is increasingly important. While South Africa's credit profile appears to be moving in a more positive direction, governance remains one of the clearest differentiators between public-sector issuers.

The benefits of an improving sovereign outlook are unlikely to flow evenly across the sector, particularly where operational and governance challenges remain unresolved.

With local government elections scheduled for later in 2026, governance is expected to remain a key theme for credit investors, influencing both market sentiment and issuer-level credit assessments into the second half of the year.

Geopolitics tests market resilience

The first half of 2026 was not without external shocks. The conflict involving the United States and Iran created significant uncertainty in global financial markets and contributed to higher energy prices and inflationary pressures.

Read: Geopolitics continues to dominate the macro narrative

South Africa felt these effects through fuel prices and inflation dynamics, prompting a measured monetary policy response from the South African Reserve Bank. Yet despite the volatility, local debt markets remained remarkably stable.

Issuance programmes continued uninterrupted, demand remained robust and spreads showed limited sensitivity to the geopolitical backdrop. This resilience reflects both the depth of institutional demand and the supportive technical conditions that currently characterise the market.

Looking ahead

The first half of 2026 demonstrated that South Africa's debt capital market is capable of absorbing significant structural change while continuing to attract capital and support economic activity. As South Africa moves through the ZARONIA transition, builds out a new FLAC market and navigates an evolving sovereign credit trajectory, the resilience of domestic credit markets will remain an important indicator of confidence in the country's broader economic outlook.