By Frans Cronje
Uncertainty is the greatest obstacle confronting investment managers and their clients. South Africa’s economic and political future shows near absolute levels of uncertainty. In the medium term, political outcomes occupy a spectrum that stretches from the long-term political survival of Jacob Zuma to an ANC defeat in 2019 at the hands of a new political coalition. Economic outcomes range from a growth recovery that may see the rand strengthen to a level below R11/$1US to a multi-year recession, complete with accelerated currency devaluation, sharply rising inflation, and significant capital flight. Add to that high levels of global volatility and it is plain South African fund and investment managers face one of the most complex decision-making environments anywhere in the world.
It is not possible in this environment for any analyst to confidently predict exact outcomes for the country at a future point in space and time. Where such forecasts are accurate in the short term, it is only because fundamental structural change has not yet occurred. When that change does occur, the forecast has no utility – at precisely the moment it was needed most.
There is a sound theoretical basis to the warning that seeking to forecast South Africa’s future to a single point in space and time is both futile and dangerous. Work done by complex systems researchers shows how even small changes in the original conditions of economies or political systems can trigger massive shifts in their future circumstances. It is that property of complex systems that triggers shifts as dramatic as the 2009 global financial crisis, the Arab Spring uprisings of 2012, and those that South African fund managers now confront.
There is only one antidote to being either paralysed by uncertainty or flat wrong about the future on the strength of flawed forecasts. The antidote lies in scenario planning. Scenarios and forecasts have very little to do with each other. Forecasts seek to identify a single future point in space and time. Scenarios seek to sketch a small number of equally plausible future worlds while equipping decision makers with the markers, or what Clem Sunter calls “flags”, to determine which of those worlds is most likely to materialise.
In May we released a new set of scenarios for South Africa in the form of a book titled A Time Traveller’s Guide to South Africa in 2030. Four plausible future South Africa’s are sketched for the year after our 2029 election. These range from South Africa copying the authoritarian capitalist philosophy of the Asian Tiger economies to an outcome that sees the country fracture permanently into enclaves, some of which will sustainably maintain some of the highest living standards to be found anywhere.
Each of the scenarios is accompanied by a small set of indicators that would be indicative of that scenario materialising. Between the scenarios and the indicators, we think that it is possible to develop a high degree of certainty about how South Africa’s short, medium, and long-term future will develop. There is enough high-quality information around that should, at the very least, provide brokerages and their clients with significant advance warning of fundamental changes to South Africa’s economic, political, and policy environment.
The upshot is that the uncertainty and guess work that surrounds a lot of strategic analysis on the country is not necessary. By changing the methods that firms use to look at the future and advise their clients, one of the key obstacles to investor success can be largely overcome.
*Frans Cronje is a scenario planner and CEO of the IRR – a think tank that promotes political and economic freedom.
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