Drylands worldwide are exposed to a highly variable environment and face a high risk of degradation. The effects of global climate change such as altered precipitation patterns and increased temperature leading to reduced water availability will likely increase this risk. At the same time, an elevated atmospheric CO2 level could mitigate the effects of reduced water availability by increasing the water use efficiency of plants. To prevent degradation of drylands, it is essential to understand the underlying processes that affect water availability and vegetation cover. Since water and vegetation are strongly interdependent in water-limited ecosystems, changes can lead to highly non-linear effects. We assess these effects by developing an ecohydrological model of soil moisture and vegetation cover. The water component of the model simulates the daily dynamics of surface water and water contents in two soil layers. Vegetation is represented by two functional types: shrubs and grasses. These compete for soil water and strongly influence hydrological processes. We apply the model to a Namibian thornbush savanna and evaluate the separate and combined effects of decreased annual precipitation, increased temperature, more variable precipitation and elevated atmospheric CO2 on soil moisture and on vegetation cover. The results show that two main factors control the response of plant types towards climate change, namely a change in water availability and a change in water allocation to a specific plant type. Especially, reduced competitiveness of grasses can lead to a higher risk of shrub encroachment in these systems. Copyright © 2009 John Wiley & Sons, Ltd.