Reading the right markers to anticipate South Africa's next 18 months (notes of an address to the Rand Club Business Club annual forecasting dinner) - 15 February 2018

The past six weeks have seen extraordinary political developments in South Africa and the prospects for the country look a great deal better than a year ago. Yet quite where these events will lead our country must still be determined.

In 2013, five years after Polokwane, we produced skeleton scenarios on the future of political parties.

An extract from those scenarios read as follows:

“South Africa’s fundamental problem is that its government has done a great deal to increase the living standards of poor people but has no means, whether through education or labour market access, to allow those same people to continue climbing the living standards ladder.  The ANC and the Government it leads are therefore in a wholly unsustainable position if they wish to retain their political dominance in South Africa.

Significantly there are now many leaders in government, the media, and civil society who will admit to this fact. The list of problems South Africa confronts, which depresses so many people, has therefore become the very thing that will drive policy change in the country. It is for this reason that we are able to be cautiously optimistic about future prospects for the country.

Of course there is still the question of how the ruling party will react to its untenable position. We are not so naïve as to think that this reaction may lead South Africa out of the woods. In fact it may very well initially compound our problems before they get better.

It is for this reason that when looking into the future there are now two broad scenarios for the future of the party (and the country).

The first is a story of a Long Dark Night. Here an obstinate ruling party and government press ahead with failed interventionist policy despite all evidence suggesting that such interventions are doing more harm than good.

This is a troublesome scenario that is likely to result in seven specific outcomes:

  • The first is that protest action takes off exponentially.
  • The second is that South Africa lags in the savings and investment figures achieved by comparable emerging markets.
  • The third is that long-term average GDP growth levels are constrained to under 3.5%.
  • The fourth is that the unemployment rate remains stubbornly high at around 25% and increases in periods of particularly low growth.
  • The fifth is that the budget and current account deficits reach unsustainable levels.
  • The sixth is that a weakening rand, higher wage settlements, and increased administered prices cause inflation to exceed its 3%-6% target band.
  • The seventh is that the ANC sees its electoral majority slip to below 60% in 2019, leading to the party's losing the 2024 election.

The second scenario is of a New Dawn for South Africa. Here the increasing demands on the ANC, and its declining resources to meet those demands, serve as a catalyst for policy reform. The reformists within the party, building largely on the blueprint laid down in the National Development Plan, seize policy control of the ANC and bring about a series of initially unpopular changes that do, however, have the long-term outcome of securing that party’s future in power.

Such a scenario should put South Africa within reach of achieving the following hard outcomes:

  • The first is that investment and later savings rates begin to pick up.
  • The second is that, subject to favourable global circumstances, GDP growth is able to average in excess of 5% of GDP.
  • The third is that at this level of GDP growth unemployment should be in sharp decline.
  • That in turn leads to a decline in protest levels and dependency on welfare.

We went on to argue that despite the then negative nature of so many political, civil rights, and policy trends – there were very important signs of embryonic reformist tendencies. We singled one out in particular:

“there are many small clothing factories in KwaZulu-Natal that operate outside of minimum wage laws and to which the Government is turning a blind eye. A little example like this is always more significant than it appears at first glance as it indicates a government starting to compromise on some of its policies. When that starts to happen it is only a matter of time before the Government starts to compromise on more and more in an effort to retain stability. This point is best made by my senior colleague John Kane-Berman, who notes how it was Jaap Marais, formerly of the Herstigte Nasionale Party, who cautioned John Vorster in 1968 that allowing Maoris to tour with the All Blacks was the beginning of a slippery slope that would lead to ‘a black man marrying your daughter and sitting next to you in parliament’. Marais was right and in compromising on the ideology of racial separateness Vorster was unintentionally putting in place the conditions that ultimately led to the negotiated settlement of the early 1990s.   

It is with good reason, and based on a sound research methodology, that we are able to offer a scenario that is more upbeat about the future of South Africa than many analysts are at this time. Certainly, we have reason to be more positive than almost any corporate board or audience we are invited to brief as we realise that a window of opportunity has been opened to change South Africa for the better. The ANC is in an impossible position and will have to change to avoid the electorate changing it in the 2024 election … (and) dramatic change is therefore inevitable for South Africa. Managed carefully and skilfully this is a process that can deliver a more prosperous and stable society”.

At the time, the reformist view – which we likened to the experience of the verligte Afrikaners – was broadly rubbished as being outside the bounds of possibility. While the scenario we have subsequently lived through was certainly not the upside one – we continued to hold out the possibility of an ANC reformation, forced by political and economic realities, in two books we published on South Africa’s future, the first in 2014 and the second in 2017.

Most especially after the events of the past 24 hours, it will soon be forgotten how very close we came to disaster. In a note to clients issued on the 6th of December 2017, we wrote that “[our baseline] model now shows that Mr Ramaphosa has a delegate majority of 50.27% and that the delegate split is therefore below 50”, while warning that “the skilful engineering of ANC branch politics” may erode that lead but that, “if his camp can minimise the rigging and intimidation, he may go on to win”.

Ultimately his camp did achieve exactly that, securing a majority of 179 votes or 51.8%. Split the 179 number in half - and if just 90 out of almost 5 000 delegates had voted differently, then Jacob Zuma would have given the State of the Nation speech last week, the currency would have weakened severely, the state capture project would have been in firm control, and South Africa’s long-term prospects would have been dire – as we repeatedly warned through the year, and at this dinner last year.

We turned literally at the brink – a remarkable thing.

Now Mr Zuma has resigned, Mr Ramaphosa is South Africa’s president, we are led to believe that Mr Zuma will be charged with corruption, some of the Gupta family have been taken into custody, and law enforcement agencies have executed raids across the country.

But, critical as it is, this is only one of the terrains to watch in order to determine what happens next for our country.

Firm action against state capture, re-establishing the rule of law, and accountable governance are necessary conditions for South Africa to reach its potential as a free and prosperous society. The signs are positive, but we must see that this action translates into scores of criminal convictions – including of people who still hold high office.

The second terrain is that of the economy and the living conditions of people. Notwithstanding the many successes achieved by the ruling party in raising living standards over the past 20 years, the challenges that remain are daunting:

To reduce the black unemployment rate to the white rate will require creating a net 1 million new jobs every year for the next decade – at an economic growth rate of 5% we may get halfway there.

The budget deficit remains at a multiple of the economic growth rate which is estimated this year to underperform emerging market averages by a considerable extent

Less than one in ten children is getting a very good school leaving qualification – one capable of placing that child on a sure track into the middle classes  

These obstacles are formidable and while South Africa’s sense of renewed optimism is warranted and welcome, I urge you not to overlook them – they are the things that stand between us and our long-term political stability and economic success.

Urgency in addressing them is paramount.

Polling done last year established that people too young to remember apartheid are considerably more sceptical about the ANC than those who remember the time. We also continue to emphasise for our clients the very high levels of coincidence between job creation, household incomes, popular confidence in the future of the country, and the ruling party’s performance in elections.

The new administration of Mr Ramaphosa will need to move swiftly to introduce the policy reforms needed to secure much higher levels of fixed investment in order to bring about the growth and job creation to buttress the sense of renewal and optimism that has accompanied his rise to power. Should they fail at this, then, in time, they may see public opinion turn against them – and when such opinion turns it is a cruel master.

As far as the scenarios go, we now have the opportunity to upgrade our view from what we call the Break-Up (in the main, a mostly free and open society but one that underperforms comparable emerging markets on most economic measures) to the Rise of the Rainbow (essentially a free and open society averaging growth rates of above 5% of GDP).

To help us make that call we employ 20 qualitative and quantitative indicators that range from labour market policy to consumer confidence levels. These are themselves ranked across five measures that range from regression to advancement or recovery (where the indicator would outperform its moving average or approach EM norms).

To be clear; to upgrade the scenario means that we are confident, for example, that the number of maths passes in matric will quadruple, economic growth levels will sustain averages above 5%, and the unemployment rate will be halved over the next decade. And, of course, so early in the transition we do not yet have the necessary hard evidence.

As for the short term – the purpose of this annual forecasting dinner – our hard calls on the politics and economics are as follows:

  • The GDP growth rate will recover to between 1.7% and 1.9% this year and South Africa may escape a ratings downgrade if the right sort of person makes a compelling case for economic growth in the budget speech next week.
  • Mr Ramaphosa will unite the ANC and the party will win a majority of between 61% and 63% in the next national election (and quite possibly higher than that if the requisite economic performance materialises), while the DA will see very limited growth and may lose control of its cities (or some of them) should the EFF return, in one form or another, to the ANC after the next election.

[The ANC result should not surprise; its delivery record is better than many of its critics allow and, even with Mr Zuma at the helm, we were confident of its securing a 2019 majority – of, we thought, close to 58%.]

Should the administration of Mr Ramaphosa use that mandate for the single-minded pursuit of investment-led economic growth, South Africa may emerge over the next decade as one of the world’s most exciting emerging markets and we may be well on our way to becoming a stable middle income economy. Watch the right markers and they will lead you around the scenario game-board – and nothing will happen in a future South Africa that you have not been able to plan for or anticipate.