Consulting firm, Intellidex, has released a new report looking at South Africa’s economy in 2019.
As part of the report, the firm outlined five major scenarios that it forecasts as potential outcomes after the May 2019 general elections.
Each of the scenarios paints a picture of how South Africa could come out of the elections, with a particular focus on internal ANC politics (and factionalism), economic growth and investor sentiment (dubbed ‘Ramaphoria mark II’), as well as the the state of SOEs and the country’s credit rating.
You can find a basic summary of the scenarios in the table below, followed by a more detailed explanation of the two upside outcomes, two downside outcomes and the baseline held by Intellidex as the most likely to actually happen.
Upside 1 – Brief flurry
- Under this scenario the ANC under Ramaphosa gets around 55-60% in the election and just manages to keep Gauteng – but the business community and investors see this as a strong mandate and latch on to small baby steps taken after the election as a sign of much greater reform to come.
- As such, Ramaphoria mark II gets extended and leads to inflows of FDI and greater domestic private sector investment for around 18 months after the elections – facilitated by banks lending more.
- However, real reform does not appear as this level of support is in fact not a real mandate and ideological pressures even around Ramaphosa’s own kitchen cabinet prevent any meaningful increase in productivity through reforms.
- There are also sizeable issues such as Eskom which catch up. Moody’s still downgrades on a lack of fiscal reform around the wage bill especially, but with the risk of it occurring not in November 2019 but later – well into 2020.
- Hence long-term potential growth remains at 2.0-2.5% but growth overshoots this level to 2.7% in 2020 before falling back. USDZAR remains lower (ZAR stronger) than in the baseline but not much stronger than where ZAR is now.
- Probability: 25%
Upside 2 – Lift-off
- Under this scenario the ANC gains over 60% of the vote and holds onto Gauteng by a decent majority. Ramaphoria mark II takes hold as in the previous scenario.
- However, this time the win represents a real mandate and the ANC starts to coalesce around Ramaphosa –both by choice and force. Importantly this allows him to recapacitate government over time in a way that other scenarios don’t allow. An attempt to remove him can still occur but would be quickly quashed.
- Crucially it means that Ramaphosa can sidestep ideological blockages within his faction – not on everything, but on enough to get some real reforms through that help improve productivity, education and SOEs and encourage ‘real’ new FDI.
- As a result, long-term potential growth rises from 2.0-2.5% to 3.0-3.5%, though without reforms to labour markets it does not go much further.
- In this scenario, ratings agencies see fiscal space emerging and consolidation becomes possible thanks to faster growth and revenue.
- As a result, the ratings risk starts to skew towards upgrades. The curve flattens significantly, with SOE risk removed. The currency rallies strongly – USDZAR moves down to around 13.0 thanks to strong FDI inflow.
- Growth rebounds strongly towards this new higher potential growth level – up towards 3.5%.
- Probability: 7.5%
Downside 1 – Stuck in the mud
- In this scenario Ramaphoria mark II quickly dies after the election as Ramaphosa loses Gauteng and needs to be in coalition. The ANC only just retains a majority nationally.
- An internal putsch against him quickly forms with attempts to remove him in 2020 failing because of a lack of coordination and help from civil society. Ramaphosa becomes largely a lame duck president, though National Treasury broadly keeps things on the road fiscally and the SARB hikes rates to backstop risk premia and the currency.
- The private sector remains strong with banks’ lending growth remaining broadly zero in real terms. As such growth does continue to recover exceptionally slowly towards low long-term potential growth of 2.0-2.5% — but with shocks like downgrades and SOEs buffeting the economy.
- Moody’s downgrades SA at the end of 2019 but there is a strong risk of it occurring earlier as fiscal issues become more acute with slower growth.
- No reform is possible in this scenario and so FDI remains minimal, as does domestic private sector investment. There is no long-term productivity boost. The currency weakens through 15.5 in USDZAR with risks to the upside.
- Probability: 20%
Downside 2 – Below the waves
- The ANC falls below 50% and enters into a coalition with the EFF and loses Gauteng and possibly another province.
- Sentiment deteriorates markedly and there is no Ramaphoria mark II. An immediate putsch is made against Ramaphosa which he struggles to defend against. An early National Grand Coalition (NGC) occurs at the end of 2019 to try push him out.
- He survives but is constrained by a party that pushes for much more radical policy in parallel with the EFF (who are over time absorbed back into the ANC). [This scenario could also occur if the ANC gets 50-55% and a successful putsch is made against Ramaphosa.]
- An economic and political crisis ensues that is unsolvable within the electoral context in the short term.
- Growth falls further as domestic private sector investment dries up and FDI becomes a net outflow as domestic capital flight (like during the Zuma years) accelerates.
- Per capita income growth remains severely negative but more importantly, potential growth actually falls as capacity and productivity is eroded by populist policies. Potential growth in the long run falls from 2.0-2.5% to 1.01.5%.
- Downgrades are inevitable but so is a fiscal crisis and an eventual IMF programme. The currency depreciates sharply and Eskom undertakes forced debt restructuring and load shedding becomes continual. SAA folds.
- Probability: 10.0%
Baseline scenario: Bumble along
“The Intellidex baseline is an interesting departure point for the four scenarios because we see the election as being less relevant for long-run growth outcomes than many people expect.
“We believe that reforms are unlikely regardless of the level of support Ramaphosa garners from the electorate (though we currently expect around 55-60% and that Gauteng is in play). This is because internal factionalism is too deep but there are also ideological blockages even within his own faction,” Intellidex said.
- We see a slow recovery to low long-term potential growth of around 2.0-2.5% (still representing only marginally positive per capita income growth) but little scope for growth beyond that.
- We expect a mixture of political noise and lack of reform together with “muddle along” on issues like Eskom resulting in a lack of significant momentum in investment growth or productivity gains.
- We think an attempt to corner and remove Ramaphosa will be made almost regardless of the election outcome and so politics will remain noisy. Still, Ramaphosa will ultimately survive thanks to the inability of alternative factions to coalesce and strengthening of institutions.
- We see a brief period of Ramaphoria mark II after the elections occurring more on “hope”, but that it will fade when additional momentum in reforms is not seen.
- South Africa gets downgraded by Moody’s in November 2019 (with a risk that it may occur earlier on SOE factors and a lack of fiscal consolidation), reform momentum is shown before the elections in rhetoric terms but actual action delayed till after and faces resistance.
- Probability: 37.5%
Overall the Intellidex view is based on expectations of a strong private sector that is slowly seeing negative constraints from the Zuma years removed to reach back to potential levels. However, this will be without the productivity-boosting reforms that are necessary to drive things higher or even faster back to that level of potential growth, it said.