Treasury Outlines Three Possible South African Economy Scenarios

(Bloomberg) -- South Africa’s gross domestic product could contract in 2019 and 2020 if contagion from a developing-economy debt and currency crisis spreads, the National Treasury said.

That’s the worst-case scenario of three possible outcomes the Treasury outlined in its mid-term budget Wednesday. On the other end of the scale, higher confidence could boost economic growth and the rand may rally.

Below are the highlights from each of the three scenarios:

Scenario A: sluggish domestic growth

  • Global growth is 0.5 percentage point lower than forecast
  • Commodity prices are lower, but oil prices stay elevated
  • Trade tensions increase and monetary policy tightens in developed economies
  • South African interest rates increase to offset inflationary pressures from a weaker rand and bond yields rise, causing higher borrowing costs
  • South African GDP grows by 0.9 percent in 2019
  • Gross debt-to-GDP ratio climbs to 68 percent by 2026-27
  • Debt-service costs increase to 18 percent of budget revenue by 2026-27
  • Primary budget deficit peaks at 1.4 percent in 2020-21

Scenario B: contagion from EM debt and currency crisis

  • Global growth is 1 percentage point lower than forecast
  • Commodity prices are 15 percent below expectations
  • Global financial conditions are tighter and risk aversion increases
  • South African exports, consumption and investment drop and rand depreciates
  • South African GDP contracts in 2019 and 2020
  • Inflation breaches 7 percent and long-term bond yields spike by more than 2 percentage points
  • Gross debt-to-GDP ratio grows to 80 percent by 2026-27
  • Debt-service costs advance to 24 percent of budget revenue by 2026-27
  • Primary budget deficit increases to 3.6 percent in medium term

Scenario C: stronger domestic growth

  • Domestic confidence continues to improve as interventions such as allocating broadband spectrum in a way that reduces costs take hold
  • State interventions ease risks that government-owned companies pose to the fiscal framework
  • Bond yields are almost 1 percentage point lower and the rand strengthens
  • GDP expansion reaches 3.2 percent in 2024-25
  • State achieves a primary surplus of 0.5 percent by 2021-22
  • Debt stabilizes at 55.4 percent of GDP in 2021-22

©2018 Bloomberg L.P.