Pressure on South Africa
(Author's note: This article was written with the research assistance of Jonathan Gruber '87 and Dan Kessler '88).
The violence in South Africa has led many people to reexamine their consciences and foreign bankers and businesses to reexamine their investments. The consequence for the South African government is an unprecedented degree of foreign economic pressure to restore political stability by stopping the violence against black people and recognizing their political rights. Another consequence is that foreign institutions, including universities, that maintain investments in companies doing business in South Africa, now run the risk of economic as well as moral imprudence.
In late July of this year, US banks with loans to private businesses in South Africa and to the government suddenly began giving notice that those loans would not be extended when they came due. That was a major and unexpected economic shock to South Africa from which it has not recovered. It had been anticipated that most outstanding loans would be "rolled over" or renewed, as is normally done. No one expected that the loans would actually be called for payment at their due dates. Neither private borrowers nor the government in South Africa were prepared to pay.
While not in danger of collapsing, the South African economy has not been robust recently. The price of gold, its major export, has been weak and there has been a severe drought. The economy in 1984 barely exceeded the output levels of 1981. Although capital exports are controlled, there is, nonetheless, evidence of a flight of capital from the country. High domestic interest rates and the need to finance growing government deficits had led private firms and the government to increase their foreign borrowing rapidly. Most of the borrowing consisted of short-term notes which came due quickly and made the country particularly susceptible to changes in the perceptions of its creditors.
Although South Africa has in the past turned to the International Monetary Fund (IMF) for emergency loans, this avenue of relief now seems to be blocked. The last IMF loans to South Africa in 1982 caused an international uproar and provoked a movement in the US Congress to oppose further loans to South Africa by the IMF. Although that never became an official action, it was part of the stimulus that led the IMF for the first time to investigate the economic damage to the South African economy caused by apartheid. That damage assessment would almost certainly stand in the way of new lending to South Africa by the IMF.
The results of these events have been a financial crisis. The government has had to declare a moratorium on payments on the principal amounts of the outstanding international loans. It has also had to squeeze its economy in order to operate with much less foreign credit than it has had. In effect, the strong economic pressures which have been the object of the movement to persuade US businesses and institutions to divest their direct and indirect investments in South Africa have arrived sooner and with greater force than had been expected.
Bankers are characteristically reluctant to give public explanations for their lending decisions, but two points have emerged. The US banks feel the pressure of the movement of divestiture. Those pressures have increased as the violence of the government against its black population has escalated. Even more important, it has been reported, is the concern among bankers over the economic effects of the violence, the disruption it is causing and the financial burden it is placing on the government. The US international banks have decided that loans to South Africa are so risky that they are pulling out. When the head of South Africa's central bank came to the United States trying to find financial support, he found the cupboard was bare for him.
There is an adage among bankers, "Don't panic -- but if you do, be the first." The US banks were the first trying to bail out of South Africa. It has been rumored that Swiss and West German banks have not joined the credit restrictions imposed by US banks and resent the US banks' decisions. That may only mean that they violated the adage and now are locked in for the duration of the moratorium along with the US banks who did not succeed in collecting on their loans.
The decision of the international US banks to pull their money out is a warning to all investors in South Africa. It is true that the South African interests of many US firms are quite small, and other investors may not face precisely the same risks that US bankers decided they faced. However, the actions of the US banks suggest that prudent institutional investors must now reconsider their investments in firms in South Africa. The banks are, in effect, saying that the risks do not justify the returns. Unlike the banks, the institutional investor is not constrained by a debt moratorium. If institutional investors have not yet been moved by the moral argument, economic prudence would dictate that they should worry about being behind the banks in divesting.