S&P said the new political leadership and subsequent policy announcements had boosted local and foreign investor confidence in the country.
It said an upturn in the global demand for commodities and manufactured goods had also boosted the growth up-tick.
However, S&P senior economist Tatiana Lysenko warned that structural challenges continued to be an impediment to further growth.
“GDP growth of just above 2percent, or 0.5percent in per capita terms, is very low for a country at South Africa’s income levels, and is not sufficient to sustainably reduce its very high unemployment levels,” Lysenko said.
“The government has taken some steps to improve the governance of SOEs (state-owned enterprises), which is an important development, but we are yet to see reform progress in other areas. A key constraint is the rigid labour market with its inefficient wage-setting mechanisms and high barriers to entry and exit.”
Economists warned that the revised forecast may not automatically result in S&P upgrading the country’s sovereign debt rating at its next review in May.
S&P and Fitch downgraded South Africa to sub-investment grade last year, while Moody’s Investors Service maintained its Baa3 rating last week, but upgraded its outlook from negative to stable.
Nedbank chief economist Dennis Dykes said the rating agencies were looking for structural changes, particularly in the areas of labour legislation, mining policy and renewable energy.
Dykes said he did not expect S&P to upgrade the country at its upcoming review.
Momentum Investments economist Sanisha Packirisamy said she also expected S&P to maintain its rating.
In January, the International Monetary Fund (IMF) slashed South Africa’s growth outlook for 2018 to 0.9percent from 1.1percent, citing political uncertainty. The IMF, however, said the forecast pre-dated Cyril Ramaphosa’s election as president of the country.
The S&P forecast comes weeks after Statistics SA announced that the economy had grown by a better-than-expected 1.3percent last year.
Lysenko said improved investor sentiment had translated into a stronger rand, lower inflation and lower bond yields, compared with S&P’s previous expectations.
“A revival in confidence and lower funding costs should support business investment, while a boost to real income from lower inflation bodes well for household spending. This should more than offset any drag on growth from the announced fiscal tightening,” said Lysenko.
National Treasury yesterday declined to comment on S&P’s next rating. It said it would meet S&P in May “and cannot comment until the meeting has taken place”.