#COVID-19: Possible alternative futures for South Africa
*This article was first published in AccountancySA. Click here for the article online. https://www.accountancysa.org.za/covid-19-possible-alternative-futures-for-south-africa/
Barely a month ago we were bemoaning the grim outlook for the global and South African economies. The world economic growth rate recorded in 2019 was the lowest since 2010. Although a slight improvement was expected for 2020, the risks on the downside (for instance trade tensions, the outcome of Brexit, and rising levels of debt in emerging market economies) were reported as being fairly high. In South Africa, we entered a technical recession (two consecutive quarters of negative GDP growth) and growth forecasts for 2020 were lowered to less than 1%. Load-shedding became the norm; SAA was (and still is) under business rescue; the Budget Speech highlighted the unsustainable indebtedness of the government; the official unemployment rate was at 29%; and Moody’s ‘junk bond’ rating was seemingly inevitable.
No business and no consumer – whether rich or poor, big or small – will be immune to the direct and indirect economic effects of the pandemic.
Today (end March 2020) the expectations and realities mentioned in the previous paragraph look rather appealing. COVID-19 has already had an indelible impact on our values, expectations, and hopes as it infiltrates every crevice of economic activity. No business and no consumer – whether rich or poor, big or small – will be immune to the direct and indirect economic effects of the pandemic. Now the question globally and domestically is not whether there is going to be a recession, but how severe the recession will be and how long it will last. It is sobering to think that even the most favourable short-term outcome contains the word ‘recession’. Indeed, the COVID-19 pandemic already shows signs of being the most disruptive global event in modern history.
Indeed, the COVID-19 pandemic already shows signs of being the most disruptive global event in modern history.
As Nouriel Roubini (2020) points out: ‘[The] shock to the global economy from COVID-19 has been faster and more severe than the 2008 global financial crisis and even the Great Depression. In those two previous episodes, stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10% and GDP contracted at an annualised rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialised in three weeks.’1
South Africa’s four alternative futures
The alternative futures for South Africa relating to this crisis will be influenced by numerous interrelationships, which may play out in many different ways. One of the most decisive relationships is that between the transmission rate of the virus and society’s response thereto. Key considerations in this regard include the ability to ‘flatten the curve’; the institutional capacity to enforce lockdown protocols; the capacity of the healthcare system to roll out widespread COVID-19 testing, tracing, and critical treatment measures; and the fiscal and monetary response.
COVID-19 has upended the world, causing considerable uncertainty and fear, but the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.
Alternative futures are usually considered performed over a long period (at least ten years). However, in this case the next few weeks and months are critical, and for this reason, this article describes four scenarios based on the multi-state actuarial model developed by NMG Consultants and Actuaries (Pty) Ltd. This model is derived from a mathematical model used to analyse the reported infections in China from 10 January 2020 to 8 February 2020.
Overview of the multi-state actuarial model
The multi-state model forecasts the progression of a population across five model states as follows:2
- The lives in the population who have not yet been infected with COVID-19 are allocated to a state labelled ‘susceptible’.
- Those lives in the ‘susceptible’ state who contract the virus are allocated to an ‘exposed’ state.
- After a latency period, lives in the ‘exposed’ state move to one of two ‘infected’ states:
- A ‘documented infected’ state for those lives who are tested for COVID-19 and test positive that is, who are documented cases of the virus, and
- An ‘undocumented infected’ state for those lives who, although infected, are not reported as such. The symptoms for this group could be mild or non-existent.
- Lives who recover, die, or never contract COVID-19 are defaulted to a fifth state. The model allows for a movement from ‘susceptible’ to this fifth state.
A number of parameters are used to determine the number of lives who move from one state to another. The NMG model has been calibrated using the parameters from the mathematical model that was fitted to the infections in China. The following parameters are used:
- A daily transmission rate of between 0.4 and 1.12 to determine the movement of lives from the ‘susceptible’ to the ‘exposed’ state.
- A relative reduction parameter of 0.55 for transmission by lives in the ‘undocumented infected’ state.
- A latency factor of 3.68 days that determines the length of time that a life remains in the ‘exposed’ state before moving to one of the ‘infected’ states.
- An infectious period factor of 3.48 days that determines how long a life remains in the ‘infected’ state, and
- A fraction of 0.69 determines the proportion of infections that are documented.
National forecast of reported infections
In figure 1, the lives allocated to the ‘documented infected’ state in South Africa based on the different assumptions for the daily transmission rate parameter in the model are plotted.
Figure 1 Projected infections based on the four transmission rate assumptions (Source: NMG Consultants and Actuaries (Pty) Ltd. )
The four alternative future scenarios are derived from the scenario curves shown in figure 1 based on the various transmission rates. These alternative futures scenarios are 1.12 (worst-case scenario), 0.80 (middle- of-the-road scenario), 0.60 (best case), and 0.4 (low probability).
The four alternative futures are discussed below followed by two models that could be used to deal with the high level of uncertainty and challenges the various alternative futures pose.
Alternative future scenario 1: Worst-case scenario
The worst-case alternative future scenario predicts elevated transmission rates resulting in a high probability that the ICU beds in both private and public hospitals (totalling 7 195) will be insufficient by the beginning of May. This could result in a war triage being applied to determine which patients are awarded one of the limited ICU beds and the cancellation of many elective procedures due to the unavailability of ICU beds.
The high transmission rate and the limited availability of ICU beds could create a more robust social awareness of the dangers of this pandemic and thus improve compliance with the government’s directives.
On the other hand, it could lead to social paranoia that could manifest in violence against people thought to have the virus.
In this scenario, there is also a high possibility of the 21-day lockdown being extended multiple times in an attempt to flatten the transmission curve and thus decrease the transmission rate, creating more capacity to treat patients needing hospital care. The Imperial College in London warns that the virus could return within weeks of the restrictions being lifted and thus to avoid this, countries may have to implement on-off cycles that need to be repeated until the virus has worked through the population.3
This scenario will probably have the longest lockdown period of all the scenarios and will therefore create the most severe liquidity crisis for businesses.
This scenario will probably have the longest lockdown period of all the scenarios and will therefore create the most severe liquidity crisis for businesses that are not deemed essential services and are thus unable to generate cash through either providing a service or selling goods during the lockdown period. This could lead to many businesses retrenching staff to avoid bankruptcy. Large-scale retrenchments and businesses filing for bankruptcy will create a credit risk for South African financial institutions. This scenario resonates with Nouriel Roubini’s notion of an I-shaped economic cycle − a vertical line representing financial markets and the real economy plummeting.4
The social effect of large-scale retrenchments will place strain on the greater society, as the affected households would need support from government through the UIF or from family to make ends meet. An extended period of lockdown and the possibility of job losses will also create psychological strain on society which could increase the prevalence of mental illness. However, this period could create a social reawakening as the pace of life slows down during lockdown, enabling people to focus on their inner lives through spending time in activities such as meditation. 5
Alternative future scenario 2: Middle-of-the-road scenario
In the middle-of-the-road scenario, the transmission rate is lower than in the worst-case scenario. The partial flattening of the curve and lower transmission rate allow more capacity to be created through alternative solutions before the demand for ICU beds exceeds the supply.
If South Africans are socially compliant during the initial 21-day lockdown, the extended lockdown could even be averted.
The probability of a further lockdown after the initial shutdown is likely, but the prospect of additional lockdowns after that will be lower as the transmission rate is considerably lower than in the worst-case scenario and the lockdown should flatten the transmission curve significantly. If South Africans are socially compliant during the initial 21-day lockdown, the extended lockdown could even be averted. This will have a significant economic and social impact on South Africa as it would decrease potential retrenchments and businesses going bankrupt.
Nonetheless, this resonates with the notion of an L-shaped cycle. Here, COVID-19 incurs significant long-term structural damage to one or more institutional contributors to production such as the labour market, capital formation, or the productivity function. In short, a sharp downturn followed by prolonged stagnation.
Alternative future scenario 3: Best-case scenario
In this scenario, the probability of the lockdown period being extended after the initial 21 days is significantly lower than in the worst-case and the middle-of-the- road scenarios. This probability could even be lowered further if South Africans comply with the government directives to flatten the curve and reduce the rate of transmission.
…it will be easier to restart business and production after only one 21-day lockdown period.
The best-case scenario will also create a sense of hope and optimism because it will have the least adverse economic and social impact on South Africa. Furthermore, it will be easier to restart business and production after only one 21-day lockdown period.
The notion of a U-shaped economic cycle is relevant here. The shock persists, and while the initial growth path is resumed, there is some permanent loss of output.
Alternative future scenario 4: Low-probability scenario
Given the actual transmission trend and trends across the world, this scenario is highly unlikely.
Should this scenario materialise, a V-shaped economic cycle could emerge. Here output declines, but economic growth eventually rebounds; on an annualised basis, annual growth rates could fully absorb the shock.
Where to from here?
From the alternative future scenarios described, it is clear that the extent of this crisis can be influenced either positively or negatively depending largely on the level of social compliance by the South African population to the directives set out by the government for the initial 21 days of lockdown. In fact, as much as COVID-19 is questioning conventional wisdom, causing considerable uncertainty and fear, the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.
In fact, as much as COVID-19 is questioning conventional wisdom, causing considerable uncertainty and fear, the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.
For all the destructive effects of COVID-19, there could be some positive changes to our world. For example, the virus has escalated the number of virtual medical consultations, which has the potential to grow in the coming years. Also, as the majority of staff work from home during this period, businesses and employees are forced to re-appraise the future of work, which may mean the end of large office buildings. This lockdown will force businesses to embrace the digitisation of business processes. The suspension of both local and international travel could encourage the extensive use of Skype and Zoom (this raises the question as to whether the need for travel will persist once the travel restrictions have been lifted). These are but a few examples where the world may be irreversibly changed for the better.
The question on many people’s minds is how to deal with the uncertainty that businesses, individuals and countries face. First, it is important to understand the difference between a complex system and a complicated system. The key differentiations between complex and complicated systems are set out below:6
- The origin of complicated problems is found in causes that are individually distinguishable and
can be addressed element by element; each input to the system has a proportionate output; the relevant systems are controllable and the problem these systems present have permanent solutions.
- Complex problems and systems are resultant from the numerous interactions within the network and thus cannot be individually distinguished; the system needs to be addressed in its entirety and cannot be addressed in a reductionist way; small inputs could result in disproportionate effects; problems that the system presents cannot be solved once and for all but rather require to be managed systematically and any intervention tends to morph into new problems as a result of the interventions; and thus, relevant systems cannot be controlled and at best can only be influenced.
The effects of COVID-19 are taking place in a complex rather than a complicated social system and therefore when considering problems faced in this crisis, the attributes of a complex system as described above need to be taken into account.7
By viewing the world and our current crisis through the lens of a complex system, one can observe the emergence of unintended and unforeseen patterns and behaviours that cannot be attributed to any of the constituents within the systems8 but must be taken into account when making decisions to address the challenges brought about by this crisis. This calls for a mind shift in decision-making because a decision could present new challenges, or the consequences of a decision could result in an unintended outcome due to the numerous interactions among the different elements within the network that cannot be individually distinguished. This results in a process of continual learning and improvement within the system.
*This article was first published in AccountancySA. Click here for the article online.
- Nouriel Roubini, A greater depression? Project Syndicate, https://www.project-syndicate… coronavirus-greater-great-depression-by-nouriel-roubini-03, 24 March 2020.
- NMG Consultants and Actuaries (Pty) Ltd, COVID-19 Actuarial modelling of the pandemic, 2020.
- Closed by COVID-19: paying to stop the pandemic, The Economist, https://www.economist.com/ leaders/2020/03/19/paying-to-stop-the-pandemic.
- Nouriel Roubini, A greater depression.
- Sohail Inayatullah and Peter Black, Neither a black swan nor a zombie apocalypse: the futures of a world with the COVID-19 coronavirus, Journal of Futures Studies, https:// jfsdigital.org/2020/03/18/neither-a-black-swan-nor-a- zombie-apocalypse-the-futures-of-a-world-with-the-covid- 19-coronavirus/.
- Roberto Poli, A note on the difference between complicated and complex social systems, Cadmus, 2(1):142–147, 11 November 2013.
- Op cit.
- Peter Checkland, Systems Thinking, Systems Practice, Chichester: Wiley, 1981.
About the authors
Prof André Roux is the Programme Head: Future Studies at the University of Stellenbosch Business School (USB) and Gideon Botha CA(SA) is a senior financial manager and Futures Studies alumnus.