World Rugby released a bid evaluation report by its experts and external consultants, and said South Africa was the unanimous pick.
The World Rugby Council will now meet on 15 November in London to vote on the next host.
Other countries biding to host the event are Ireland and France.
What remains now is to wait for the vote of eligible member unions on 15 November.
The nation boasts a rich rugby heritage, having twice won the World Cup, and much of the necessary infrastructure is already in place following the 2010 FIFA World Cup - the first time fooball's biggest tournament had been staged on the continent.
From the above criteria, South Africa ranked highest with 78.97%, France second with 75.88% and Ireland third with 72.25%.
They also included the likely commercial success and guarantees, venues and political stability.
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Meanwhile an IRFU statement from Dick Spring, Chairman of the Ireland 2023 Bid Oversight Board, read: "While It is disappointing not to have received the initial recommendation from Rugby World Cup Board Limited, there is nothing in the report which is insurmountable and this is certainly not the end of the road".
"Those behind Irelands bid have said they will continue to lobby right up until the World Rugby Council makes it final decision in London on the 15th November and we wish them well in their efforts".
We absolutely believe Ireland can secure the tournament for 2023.
In assessing the "cities" put forward in the Irish bid, the report said that one is "significantly smaller than the other bidders" smallest city", later saying that Killarney "is not sizeable with less experience in large scale worldwide events'.
Derry had been named in the final 12 cities bidding to stage games in the 2023 World Cup. "In line with World Rugby's mission to deliver a ground-breaking, rigorous and fully transparent host selection process for its showcase event, the report is being published today as agreed by Council".
In a 220 page document the Rugby World Cup board state: 'The comprehensive and independently scrutinised evaulation re-affirmed that we have three exceptional bids but it also identified South Africa as a clear leader, based on performance against the key criteria'.
"Our team will compete to the final whistle as we bid to turn our historic bid plans into reality".
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