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Treasury outlines three possible economy scenarios

Worst-case scenario is if SA’s GDP contracts in 2019 and 2020 as a result of contagion from a developing-economy debt and currency crises.

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% in 2019. Gross debt-to-GDP ratio climbs to 68% by 2026-27. Debt-service costs increase to 18% of budget revenue by 2026-27. Primary budget deficit peaks at 1.4% 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% 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% and long-term bond yields spike by more than 2 percentage points. Gross debt-to-GDP ratio grows to 80% by 2026-27. Debt-service costs advance to 24% of budget revenue by 2026-27. Primary budget deficit increases to 3.6% 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  1percentage point lower and the rand strengthens. GDP expansion reaches 3.2% in 2024-25. State achieves a primary surplus of 0.5% by 2021-22. Debt stabilises at 55.4% of GDP in 2021-22.

© 2018 Bloomberg L.P

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I was hoping for “scenario D”, being:

GDP growth to exceed 5% year on year.
ZAR to strengthen below R12/$
Corporate & Individual tax rates to drop
SA debt service costs reduce , stabilizes around 30% GDP.

(Achievable, or am I smoking weed legally?)

End of comments.

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