2 scenarios for where South Africa is heading over the next seven years
The National Treasury has published two forecast scenarios for South Africa’s economy until the end of 2029.
The forecasts, which form part of Treasury’s Budget Review published on Wednesday (23 February), can be broadly categorised as an ‘upside’ and ‘downside’ scenario based on factors such as reforms, inflation and debt containment.
Real GDP is expected to grow by 2.1% in 2022 and average 1.8% over the medium term, Treasury said this week. A more rapid implementation of economic reforms, complemented by fiscal consolidation, will ease investor concerns and support faster recovery and higher levels of economic growth over the long term.
The upside
The upside scenario assumes that the fiscal consolidation is complemented by accelerated economic reforms.
These include ensuring energy security, reducing red tape and lowering the cost of doing business through improved transport and communication infrastructure.
These reforms help create an enabling environment for improved private‐sector participation. Confidence levels improve, supporting a marked easing of sovereign risk and lowering economy‐wide borrowing costs.
These changes bolster private investment levels and consumer demand. GDP increases above the baseline forecast and is 0.7 percentage points higher by 2024 (Figure 2.10). The cumulative effect of these gains is compounded over the long term, raising potential growth.
The downside
Weaker global growth and more persistent global inflation. This scenario quantifies the impact of slower global growth and persistent inflationary pressures.
Higher global inflation leads to a rapid tightening of monetary policy. Mounting risk aversion takes its toll, as South Africa’s risk premium and borrowing costs increase and feed into economy‐ wide borrowing costs.
This in turn reduces local business investment and erodes consumer purchasing power. As weaker global demand depresses exports and commodity prices, GDP averages 0.4 percentage points below the baseline between 2022 and 2024.
The delayed recovery entrenches scarring from the pandemic and reduces long‐term potential growth. The weaker exchange rate, higher input costs and imported inflation push CPI inflation to 5.1 per cent in 2022, moderating to 4.5 per cent by 2024.
“In South Africa, supply constraints linked to raw material shortages, disruptions in global supply chains and elevated production costs could lead to higher consumer inflation,” Treasury said.
It added that unreliable electricity supply remains a serious constraint on domestic growth.
“The implementation of revised licensing thresholds and energy reforms may raise fixed investment and the economic outlook over the medium term.
“A further deterioration in the public finances due to spending pressures and the materialisation of contingent liabilities could trigger additional credit rating downgrades, increasing borrowing costs and crowding out both private and public investment.”
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