Australia, who will be bidding for a third consecutive world title when the 2007 tournament gets underway in the Caribbean on March 11, lost their top spot when they slumped to their fourth consecutive defeat in a five-wicket loss to New Zealand on Sunday.
In contrast, South Africa sealed a 3-1 victory over Pakistan last week to help them snatch the world top ranking.
"It's a great honour for South Africa, it's come at the right time," Donald told the BBC.
"They played all right against Pakistan but I still think a few things need to be ironed out before the World Cup starts but this will give South Africa a massive boost," said Donald, who played in 72 Tests and 164 ODIs for South Africa.
"To win World Cups you need to have 15 players in form, or 15 players that you know you can pick in one or the other. South Africa are just catching that momentum, they are just moving in with a lot more confidence."
South Africa, who only played their first World Cup in 1992, have still to win the event but many believe this could be their year.
Donald, however, insists it's tough to predict the winner of the marathon event which will not be decided until April 28.
"Maybe Australia are feeling the heat a little bit because I think there could be a few players who are really tired," he said.
"The timing of it, although Australia will not admit it, going into the World Cup a little bit bruised and a few egos being hurt.
"I think it's anybody's cup this year, I think it's going to be closer than anyone thinks and I don't think one side is going to run away with it."