3 possible scenarios for SA’s Economic Future
Momentum Investments outlines three possible scenarios for SA’s economic future - From the efficacy of the global vaccine rollout programme and economic stimulus policies, to whether the ruling ANC retains its majority in South Africa and implements economic reforms, Momentum Investments reveals the scenarios it uses to underpin its investment decisions
Momentum Investments has identified three scenarios that it believes will determine South Africa’s future growth prospects, revealing that, while there is some optimism and chance that the South African and global economies will emerge positively from the Covid-19 socio-economic crisis, there is a 65% chance that South Africa will continue to ‘muddle’ its way through the next few years of economic challenges.
This is according to Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments, who this week outlined how the company uses scenario planning to better inform its investment strategy and gave insights into what the socio-economic future of South Africa may look like in the wake of Covid-19.
“Our basic premise at Momentum Investments is that, because the future is unknown, we must be humble enough to acknowledge that our ability to see the future is as limited as everybody else’s. As a result, we guard against putting all our investment eggs in one proverbial basket, knowing that we cannot ‘back’ only one specific future envisaged outcome for our investments. We construct portfolios in a way that takes into account the fact that an expected outcome may not materialise, and that other scenarios could come to be in the future.”
“In essence, we invest for the central most probable base case scenario, but also take cognisance of the positive and negative pair risks incorporated in two other possible scenarios – a worst case scenario, and a best case scenario,” he explained.
The Momentum Investments team is currently working with three such scenarios for South Africa’s immediate future:
(1) Base case scenario: ‘Muddle Through’ (65% probability)
What will happen? In this case, South Africa initially experiences an economic growth rebound, but this will be off a low base due to the significant economic downturn during the Covid-19 lockdowns, as opposed to structural reforms, which would lead to more sustained growth. Slow reforms and vaccination hesitancy will prevent a positive trend from continuing in the medium- to long term.
(2) Worstcase scenario: ‘Deflation’ (20% likelihood)
What will happen? Weak global growth and the absence of any local economic reform agenda causes South Africa’s growth potential to plunge towards zero. A sovereign credit rating downgrade spiral ensues and there is an increased probability of an IMF or World Bank bailout.
(3) Bestcase scenario: ‘Reflation’ (15% probability)
What will happen? Fast economic reforms initiated by Government and strong global economic growth will lift SA’s growth potential. This enables the country’s credit rating to gradually move closer towards investment grade in the longer term.
South African growth scenarios
Global growth scenarios
What will determine which path South Africa takes?