Investec has published its updated economic scenarios for South Africa – including ‘extreme’ scenarios on the upside and downside for where the rand/dollar exchange rate and repo rate could land up if certain conditions are met.
The forecasts, which were published in a research note on Monday (20 June), consider several factors including the Ukraine war, expropriation without compensation, and the global oil crisis.
Extreme upside case – 1% chance of occurring
In this scenario, the impact of Covid-19 locally and globally is rapidly resolved, with South Africa seeing rapid annual economic growth of 3-5% and then 5-7%.
This is complemented by good governance and growth-creating reforms, the strengthening of property rights, and no further moves on expropriation without compensation or attempts at nationalisation.
This is boosted by high business confidence and fixed investment growth, substantial foreign direct investment, and strong fiscal consolidation as the government brings debt under control.
Inflation will be subdued on the extreme rand strength, rapid capacity expansion and very favourable weather conditions.
This scenario is categorised by strong global growth, a continued commodity boom, the stabilisation of credit ratings and the subsequent credit upgrades.
Upside case – 4% chance of occurring
In this scenario, South Africa sees a quick rebound from the Covid pandemic, alongside rising confidence and investment levels, while existing structural problems are eroded. Similarly, global risk dissipates and demand quickly returns to trend growth.
Policies of land expropriation are largely abandoned or are done in such a way so as to have no impact on the economy, while nationalisation takes place.
South Africa sees lower than expected inflation on the back of good weather, rand strength, government interventions and increased privatisation.
This scenario is categorised by no further credit rating downgrades, will signs of possible upgrades as debt projections fall substantially.
Base case – 50% chance of occurring
In this scenario, South Africa sees recovery from the sharp global economic slowdown by 2024 in real terms. Sufficient global and domestic monetary and other policy supports to growth and financial markets occur, and risk sentiment shifts from neutral to positive.
Expropriation of private sector property is limited and does not have a negative impact on the economy or on market sentiment.
Civil and political unrest wanes, while inflation is impacted by the normal course of weather patterns. The country sees a modest transition to renewable energy and slow move away from fossil fuels, while measures to combat climate change are introduced modestly.
This scenario is categorised by South Africa staying with a BB credit rating as debt stabilisation occurs.
Lite downside case – 39% chance of occurring
In this scenario, the international environment is the same as that of the base case, but South Africa fails to bring its debt under control and a recession occurs.
There is very limited expropriation without compensation of private property, which leads to some negativity leaking through to the broader economy.
Business confidence remains depressed, the rand continues to see weakness, higher inflation continues, significant load shedding occurs, and there continues to be weak foreign investment. However, substantial fiscal consolidation does ultimately occur.
This scenario is categorised by South Africa failing to see its debt projections stabilise, and falling into a single B rating from all three credit rating agencies for local and foreign currency.
Severe downside case – 6% chance of occurring
In this scenario, South Africa and the rest of the world grapple with a lengthy global recession and financial crisis – leading to insufficient monetary and other policy supports for growth.
South Africa enters into an economic depression and experiences severe rand weakness and very high inflation. The economy is also forced to grapple with a wider level of property expropriation and attempts at nationalisation.
The government is forced to borrow from increasingly wider sources as it sinks deeper into a debt trap. This eventually leads to widespread civil unrest and strike action.
This scenario is categorised by South Africa being rated with a single B from all three credit agencies, with further downgrades into CCC grade and eventually default.