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President Cyril Ramaphosa’s failure to drive reforms and plan a sensible succession strategy while getting himself ensnared in a corruption scandal has created a situation where a Paul Mashatile-led African National Congress (ANC) administration may come to power and bring the uMkhonto weSizwe Party (MKP) and the Economic Freedom Fighters (EFF) into the government. Should that occur, and should that new administration follow through on its policy pledges, while managing to solidify power after the 2029 election, a fairly certain set of economic consequences will ensue.

It is useful to think of these consequences in terms of three phases. Phase one covers the initial market reaction; the secondary phase covers the deepening loss of confidence in the country’s economic fundamentals; the tertiary phase covers the final set of consequences as confidence in fiscal and economic prudence is lost.

Start with the currency.

In phase one, the rand could fall by 10.0% to 15.0%, moving from around R18 to the dollar into the R20 to R21 range as investors priced in the end of the Government of National Unity (GNU) reform premium and the arrival of a more radical policy coalition.

In the secondary phase, amid black economic empowerment (BEE) enforcement, firm moves towards expropriation without compensation (EWC) and the National Health Insurance scheme (NHI), the rand could move through R25 and then R30 – as market sentiment moved from repricing into capital flight. Foreign investors would sell bonds and equities. Local firms would hold back investment. Wealthier households would seek to move more savings offshore. Importers would rush to cover dollar exposure.

In the tertiary phase, as the new government undermined the South African Reserve Bank (SARB), moved to nationalise pensions into a single national social security fund (along the lines of the NHI), imposed capital controls, or moved towards asset prescription, the rand would move through R40 and R50 levels to even test R100 to the dollar.

Now consider the effect on interest rates.

In phase one, the Reserve Bank would have to move fast to defend the rand and mitigate inflation fears (a weakening currency increases the cost of imported goods, thereby “importing” inflation). The repo rate is currently 6.75%, with prime at 10.25%. The Reserve Bank would immediately have to hike by between 150 to 200 basis points, taking the repo rate toward 8.25% to 8.75%, and prime toward 11.75% to 12.25%.

In the secondary phase, as the rand fell through R25 and R30 levels and inflation expectations broke upward, the repo rate could be forced into the 10.0% to 15.0% range, with prime moving toward 13.5% to 18.5%. That would crush bond borrowers, homeowners, vehicle buyers, property developers, retailers, and small businesses.

The effect would be for monthly bond repayments on a home worth R2 000 000 to increase from under R20 000 to over R30 000.

A lot would hinge, however, on whether the bank would be allowed to hike rates at all, as considerable political pressure would be placed on it not to. That would risk an even worse result, in which interest rates detached from South African economic reality, causing an even steeper crash in the value of the currency – and helping to trigger the broader “third phase”.

In that third phase South Africa would essentially surrender monetary credibility, and interest rates would stop working normally. The repo rate could move above 20.0%. But even that would not stabilise the currency as investors believed the state was no longer fiscally or institutionally credible.

Now go to the implications for bond yields.

The government borrows money to fund the state via issuing bonds. The yields are the interest rate the government pays on those bonds. Yields move inversely to the price of bonds. If there is confidence in South Africa, demand for its bonds will increase, with the result that yields come down. If demand slips, the price of the bonds falls, with the effect that the yield increases.

In phase one, the 10-year bond yield would jump by 100 to 250 basis points. If the 10-year yield was near 9.0%, it could move toward 10.0% to 11.5%. Debt service projections would worsen as state would have to borrow at higher rates.

In the secondary phase, the 10-year yield could move into the 13.0% to 18.0% range. That would indicate investors were no longer pricing South Africa as a reforming emerging market – but rather pricing in the risk of extreme policy reversals.

In the tertiary phase, bond yields could move above 20.0%, or the market could start to close to the state altogether (demand would be very low and essentially plainly speculative), especially if the independence of the central bank had been curbed. As in examples such as Venezuela the ensuing crisis would see South Africa default on its debt.

From that would follow the implications for government debt levels.

In phase one, gross loan debt would move away from the projected stabilisation path of around 78.9% of GDP. Higher yields, weaker growth, and lower tax revenue would push debt to between 82.0% and 85.0% of GDP. This would unwind much of the progress made by the National Treasury at curbing South Africa’s debt levels, triggering what will become a series of credit downgrades by ratings agencies.

In the secondary phase, the debt ratio could move toward 90.0% to 100.0% of GDP – and South Africa would have to increase borrowing just to pay its increasing debt bill.

In the tertiary phase debt could move well above 100.0% of GDP to a level that makes prediction extremely difficult as the economy would be sliding into a situation that is essentially beyond anything that might be found in an economics textbook. To fund itself the state would need to ravage pensions and savings – and the nationalisation of these would be well in train, enabled by South Africa’s already existing expropriation laws.

As debt levels increased, so would the budget deficit (the deficit is the difference between what the government earns in revenue and what it spends).

In phase one, the budget deficit would move from the projected 4.5% of GDP path toward 5.5% to 6.5% as revenue fell and the interest bill rose.

In the secondary phase, the deficit could move toward 8.0% to 10.0% of GDP. That would place South Africa close to the kind of fiscal danger zone along the lines of Argentina’s 1980s crises.

In the tertiary phase, the deficit could move above 10.0% of GDP, with exact projection becoming difficult amid a clutter of hidden bailouts, unpaid bills, state guarantees, off-balance-sheet liabilities, and central bank hijinks.

Next move the thinking to inflation.

In phase one, a 10.0% to 15.0% fall in the rand would lift inflation from around 4.0% into the 6.0% to perhaps 8.0% range (depending on energy prices and the like). Fuel, imported food inputs, medicines, machinery, fertiliser, electronics, and capital goods would all become more expensive.

In the secondary phase, as the rand moved through R25 or R30 and investment began to collapse, inflation could move into the 10.0% to 20.0% range. This would not be demand-driven inflation. It would be currency and supply-side inflation. The economy would be weaker, but prices would still rise because the rand had fallen, imports were more expensive, and firms were no longer investing enough to expand supply.

A weaker currency, rising yields, and growing national debt would later incentivise the state to resort to money printing in addition to asset prescription and pension nationalisation to reduce its financing burden.

Such printing would be a primary trigger for the tertiary phase and as the rand moved through R50 to R100, inflation could move beyond 30.0%, and then rapidly multiply beyond that. Zimbabwe’s inflation reached an estimated 79 600 000 000.0% month-on-month and 89 700 000 000 000 000 000 000.0% year-on-year in 2008 (at this rate of inflation, prices double roughly every 24 hours), while Venezuela recorded inflation of 130 060.2% in 2018.

It follows that the investment rate would do very badly.

Fixed investment would likely fall from its already weak levels as domestic firms delayed expansion and foreign investors pause new projects.

In phase one, the investment rate would fall to between 12.0% and 13.0% of GDP – entering essentially a care and maintenance zone.

[The investment rate is the key measure determining how fast the economy grows.]

In the secondary and tertiary phases, the data would get all scrambled as GDP itself would be diminishing and the currency devaluation would further scramble the maths. In phase one, the economic growth rate would fall toward zero.

In phase two, GDP would contract by 2.0% to 5.0% as investment, confidence, imports, credit, and consumption weakened in unison.

Phase three, the tertiary phase, would produce a multiyear depression, with GDP shrinking by double digits over time as productive capacity, skills, capital, and tax revenue left the system.

The social consequences would, of course, be severe, as would the political consequences.

How realistic is any of this?

It is perfectly so, to the point of there really being no alternative set of conclusions to reach, if the ANC drafts the MKP and EFF into the government, then follows through on its policy pledges, and then, in the final step, consolidates that administration though winning the 2029 national election. Along the way there are many options to head off the risk, ranging from managing a saner ANC leadership transition to defeating ANC/EFF/MKP at the 2029 election. These are all realistic options too. Middle-class people also have the relative safe harbour of South Africa’s enclaves to retreat to, as this newspaper has explained at length. But the reality is that an absence of real reforms, the maintenance of a very low rate of investment and growth, and the unemployment rate that follows from that, read against Mr Ramaphosa’s appalling management of the ANC succession process, and the fact the he is now the central accused in the most sensational corruption trial the country has seen, all have consequences and that those have brought these risks to the fore. Sensible people should hedge their positions accordingly.