Massive shift for South Africa’s best and worst-case scenarios
The mood in and towards South Africa has shifted significantly since the 2024 national elections. The market’s biggest fears have slowly dissipated, opening the way for hope and optimism that the country can turn things around.
This is according to the latest Event Risk scenario assessment from finance group Invested, which shows that the probability for a “downcase” scenario has dropped from 43% around the time of the election to 35%.
Meanwhile, the ‘upside’ scenario, which had a paltry 2% probability at the time of the elections, has now jumped to 12%, representing a significant shift in sentiment.
According to Investec chief economist Annabel Bishop, the shift in tone comes as South Africa continues to work towards removing the impediments to a stronger economic growth environment.
This has been felt most tangibly so far in the suspension of load shedding, but the change in government has also been key in lifting the potential for a stronger outlook, she said.
“The downside risk has meaningfully reduced as fiscal consolidation is a fundamental tenet of the newly established Government of National Unity (GNU) in South Africa, with the risk of a shift to the left and fiscal deterioration avoided.”
The ‘shift to the left’ was a big fear after the national elections, where the African National Congress (ANC) not only lost its majority but also slipped under 40% of the vote, necessitating a coalition government to form.
Markets had feared that the ANC would move to join with the EFF (and later the MK Party) in what investors viewed as a highly destructive and anti-business bloc.
However, the ANC ended up pivoting in the opposite direction. Although not entering into a formal coalition with the DA and other ‘pro-business’ and ‘pro-economy’ parties, the former majority party invited all parties to enter the GNU.
The DA and the IFP were the first to join up, sealing the presidency for the ANC. The EFF and MK precluded cooperation with those parties for their support, but by the time they were willing to even negotiate, the GNU deal had already been done.
Because of this and other positive developments since the election, economic scenarios for South Africa have turned more positive.
“The down case—lite and severe down cases combined—has reduced in probability to 36%, from 51% before the election, as South Africa has seen the likelihood of centrist economic policy outcomes substantially strengthened,” Bishop said.
Consequently, the upside—which consists of the up and extreme up cases—now has the potential of a 14% outcome, up from a 3% likelihood, as the possibility of stronger economic growth outcomes has increased substantially.
While the upside is now more probably than it was before, realistically, the economy is unlikely to shift rapidly, and the probability risks are still to the downside.
The base case for the country, which follows the “more of the same” outlook of low growth and slow reforms, is still the most likely path forward, with probably set at 50%.
The scenarios, as detailed by Investec, are below:
Extreme Up Case: 2% (up from 1%)
- GDP Growth: 1.1% in 2024, 3.3% in 2025
- Rand/US$: R16.50 end 2024, R14.50 end 2025
- Economic growth lifts to 5% quickly and then to 7% thereafter
- Economy is boosted by good governance and growth-creating reforms
- No expropriation without compensation and strong property rights
- No nationalisation
- High business confidence and fixed investment growth, along with substantial foreign direct investment
- Debt ratios driven down to 20-year lows
- Subdued domestic inflation
- Extreme rand strength
- Very favourable weather conditions
- Very short greylisting
- Strong transition away from fossil fuels and a quick transition to renewable energy
- Commodity boom, global risk-on environment
- Rapid upgrades of credit ratings
- Comprehensive measures to alleviate climate change
- The Russia/Ukraine war ends quickly
Up Case: 12% (up from 2%)
- GDP Growth: 1.0% in 2024, 2.4% in 2025
- Rand/US$: R17.20 end 2024, R16.70 end 2025
- Economic growth lifts towards 4% over five years
- Economy is lifted by rising confidence and investment levels
- Rand strengthens
- No nationalisation
- No expropriation without compensation
- Low domestic inflation on favourable weather and global conditions
- Lower state-controlled price inflation on increased privatisation
- Positive outlooks on credit ratings, which turn into upgrades
- Greylisted for less than 18 months
- Substantial transition to renewable energy and a faster move away from fossil fuels
- Comprehensive measures to alleviate climate change
- The Russia/Ukraine war ends
Base Case: 50% (up from 45%)
- GDP Growth: 1.0% for 2024, 1.6% for 2025
- Rand/US$: R17.70 end 2024, R17.20 end 2025
- Economic growth is modest, lifting to 3% over five years
- Economy limited by load shedding and freight constraints
- Rand stabilises and strengthens slightly
- Inflation impacted by weather patters, leading to food inflation
- Little expropriation without compensation occurs, no negative effect on the economy
- No nationalisation
- Modest transition to renewable energy and slow move away from fossil fuel
- Measures implemented to alleviate climate change
- Russia/Ukraine war persists but does not escalate
- Middle East tensions do not escalate
- Greylisting is temporary
Lite Down Case: 35% (down from 43%)
- GDP Growth: 0.6% for 2024, 0.2% for 2025
- Rand/US$: R19.70 end 2024, R19.50 end 2025
- Economy starts receding, only crawling to 1.0% in five years
- South Africa fails to stabilise its debt
- Credit ratings downgrade to single B status
- Substantial fiscal consolidation preventing ratings falling into the C grades
- Business confidence is depressed
- Load shedding returns and is substantial
- Marked freight constraints
- Weak investment growth
- Political and social unrest
- High inflation on unfavourable weather conditions
- Marked rand weakness
- Little transition to renewable energy or measures to alleviate climate change
- Limited expropriation of private sector property without compensation with a slight negative impact on the economy
- Lengthy greylisting
Severe Down Case: 1% (down from 9%)
- Rand/US$: R21.40 end 2024, R21.90 end 2025
- Lengthy global recession and global financial crisis
- Insufficient monetary support
- Very high inflation on severely adverse weather conditions
- Severe rand weakness
- South Africa rated B by all ratings agencies, and eventually pushed to C-grade
- Increased risk of default
- The government borrows more and sinks deeper into a debt trap
- Severe load shedding
- Severe political and social unrest
- Failure to transition to renewable energy
- Failure to alleviate the impact of climate change
- Expropriation of private property without compensation with a noticeable impact on the economy
- South Africa blacklisted
- Russia/Ukraine war escalates to NATO countries
- Middle East conflicts escalate
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