Nena Uche *
hat people of goodwill around the globe hoped for South Africa but wondered if it would ever come to pass, as the country lurched toward democracy, is beginning to materialize. South African whites and blacks are forging partnerships, foreign companies are returning, and its economy is revving up again and revitalizing others in the region. The alternative scenario of mayhem that the prospect of black majority rule once conjured is gradually fading from people's minds.
The "scramble" for South Africa is still over the horizon. But there is a steady stream of businesses setting up shop in the re-invented nation. The number of American firms doing business there has risen from 184 three years ago to 500. The list of such corporations is impressive. It includes AT&T, Citicorp, Colgate-Palmolive, Digital, Eastman Kodak, Gillette, IBM, Johnson & Johnson, Lotus, Motorola, Pepsico, Procter & Gamble, and Reebok. Many investors, however, remain cautious of the politico-economic atmosphere in South Africa, especially after President Nelson Mandela steps down in 1999. This uncertainty is epitomized by the $2 billion drop in US investment alone in the country. American companies currently have $1 billion worth of investment in South Africa, down from $3 billion just a decade ago. To lure foreign investment, Mandela's African National Congress, continues to shed much of its pre-election socialist rhetoric and is engaging in the kind of capitalist reform that inspires investor confidence. Mandela himself recently toured the world asking investors to return.
To reaffirm its commitment to economic growth, the government recently abolished the financial rand, reducing both the risk and cost of foreign investment. Some foreign investors used the "finrand" as an excuse not to invest. The discredited apartheid South African government had instituted the dual currency system to attract capital during its years of isolation by requiring foreign investors to buy and sell in the financial rand, which traded at up to 10 per cent discount to the commercial rand used by residents. Dividends were also paid to non-residents in the commercial rand. The government had hoped that this would attract capital to the country and stem its outflow. The full implications of scrapping the financial rand are yet to play out. Early indications suggest a slowdown in capital flight, a phenomenon that threatened prosperity in the run-up to the first multi-racial elections. The government is committed to instituting standardized trade practices and eroding the layers of bureaucracy which controlled and regulated capital.
A leader among "emerging markets"
The economic reforms being undertaken by the ANC-led government are paying dividends. In the last six months, a steady flow of short-term capital from abroad has boosted the country's net reserves from $600 million to over $1.9 billion and gross reserves from $420 million to $2.7 billion. The hugely successful government issue of $750 million worth of bonds and the prospects of more issues is also expected to ensure sufficient foreign reserves.
South Africa's highly developed financial, industrial, communication, and legal infrastructure puts it at the top of the emerging markets league table. Its stock-exchange, capitalized at $200 billion, is the tenth largest in the world. This conducive atmosphere has gone down well with investors. Recent favorable ratings from Standard & Poor's and Moody's Investor's Service Inc. are encouraging large investors to add South Africa to their portfolio. Morgan Stanley Group Inc. is adding South Africa to its emerging markets stock index, and State Street Global Advisors is putting up $30 million to $50 million of its $800 million fund for South African shares. Other African regional equity funds expected to increase their allocations to the South African market include Alliance Capital Management's $250 million Southern Africa Fund, Emerging Markets Investor Corp's $30 million Africa Emerging Markets Fund, and Robert Flemming's New South Africa Fund.
Attracting investment is certainly a necessity; making that investment pay dividends is a bigger challenge. The South African market retains some features of emerging markets: capital control, the existence of large monopolies, and illiquidity of equity markets. The expected investment deluge will certainly erode many of these features, but not without a fair amount of painful introspection and tough choices. The government is expected to enhance the performance of its economy by privatizing state-owned companies such as Eskom, which generates half the electricity produced in sub-Saharan Africa; Transnet, which owns South African Airways; and Telcom, the telecommunications company.
Big strides for black business
Mineral-rich South Africa is not relying entirely on outside investment to revitalize its economy. There has always been a solid internal capital base built upon by local business which, despite being predominantly white-owned, has a significant black component. Beyond investing in stocks and bonds, foreign investors are encouraged to invest directly in already existing businesses, or in start-up companies in joint partnership with South Africans.
There is a growing emphasis on the participation of blacks in new businesses. The US Agency for International Development (USAID), among other institutions, is pledging support for a wide range of programs that promote black private sector investment. Only one black-owned business is listed on the Johannesburg Stock Exchange, hence the need for black success stories to help alter the lingering perception that blacks lack business acumen. The apartheid policy of denying blacks access to capital and good education fostered the perception of "black business" as an oxymoron, even though a small black business community did manage to exist. There are indications that "black business" could become a metaphor that speaks of the triumph of a people long victimized.
The prevailing wind of change has nudged many white corporations to reach out to blacks. Anglo-American, the country's largest corporation, is selling some of its holdings to black investors. Blacks are being appointed to board memberships in many corporations, even though few gain executive positions. There have been a few take-overs of leading companies by black businessmen—most notably The Sowetan, the country's largest daily newspaper.
Driving the upswing in black business ownership are African-Americans. They are being warmly received by the new South African government, partly because of the role they played in dismantling apartheid. There is, however, some resentment towards the many blacks who have poured in from the United States and from other African countries like Nigeria, Ghana, and Zimbabwe. The National Minority Business Council, which helps small businesses in New York to establish links with South Africa, is trying to educate blacks in the US and in South Africa about one another's sensibilities.
In the vanguard of African-American investment in South Africa is Maceo K. Sloan, chairman, president, and CEO of NCM Capital Management Group. He is hoping to raise between $200 million and $400 million for investment in African companies, beginning with those in South Africa.
Bill Thompson, Managing Director of Boston-based Vista Royal Bancshares which plans to open a merchant bank in South Africa has realistic expectations. "Because of the negative perception of some blacks who have gone to South Africa and failed to deliver, I want to make sure I have everything in place before starting business negotiations," he explains. Thompson is excited about the challenge presented by South Africa and other emerging markets in Africa. He sees technology as one of the major areas that offers great opportunities for investment. He envisions Africa leapfrogging into a new technological age by harnessing the latest technologies, especially those in telecommunications. To him, South Africa, with its already developed infrastructure, offers the perfect take-off board for the rest of the continent.
Courting investors—local and foreign—has not undermined ANC government's commitment to redressing the injustices of apartheid. Beyond a moral obligation to do so, the government is realizes that to sustain the kind of socio-political climate favorable to business, apartheid's legacy of socio-economic imbalances need to be corrected. The challenge is how to bridge the yawning gap between rich whites and poor blacks without jeopardizing economic growth. Towards this direction South Africa has not instituted the sort of austerity measures in place in most developing nations. Rather, it has made liberalization of the economy to be the long-term goal of its Reconstruction and Development Program (RDP), in order to generate and sustain higher secular growth. To augment RDP resources, foreign investors are expected to support specific key programs via a 5% investment levy.
Political uncertainty remains a cause for concern for potential investors. The world has responded well to Mandela's transition from a freedom fighter to a consummate statesman who has put the survival of his country first. The confidence reposed in his leadership resonates in stock exchanges. Pre-election anxiety knocked the Johannesburg market's broadest index down to 4,849 in early April. But by April 28, 1994—election day—it was at 5,250 and it closed at 5,866 on April 21 this year. On the flip side to Mandela's presidency are concerns about his successor. Will the next president have as comparable a stature and as pragmatic an approach to leadership as does Mandela? There are also concerns about the qualifications of many of the blacks who have been catapulted to important positions with the dawn of the new era, many of whose work experience has been procured more from the "battle- field" than from the corporate or public sector. However, a large number of black South Africans have received quality education in many of the top universities in America and elsewhere.
Strong international support
For now, South Africa's growing stock of goodwill in the community of nations is yielding impressive monetary dividends. The country's new favorable credit ratings have increased access to currency and credit through loans and have also raised the prospect of a favorable balance of payment. In-coming aid packages also guarantee cash in-flow. US president Bill Clinton recently pledged $600 million in aid over three years. The windfall from the US includes:
• The creation by the Overseas Private Investment Corporation (OPIC) of two private equity funds, totaling about $150 million, to finance the creation of US businesses in South Africa.
• The grant of special trade preferences under which 4,400 South African semi-finished and agricultural products will be permitted to enter the United States duty-free.
• The allocation of $1 million by the Trade and Development Agency to finance feasibility studies in South Africa.
• The formation by USAID of a $100 million venture capital fund for South African businesses, especially those that form partnerships with US companies.
South Africa, the country once rejected by others, appears set to become the cornerstone of many economies on the African continent. South Africa's gross national product (GNP) of $2.67 billion is seven times the combined GNP of its immediate neighbors. Provision of utilities is one service South Africa could render its neighbors. South Africa's low-cost electricity provides it with a comparative advantage in Africa. Mr. John Maree, the chairman of Eskom, the giant electric utility, envisions the country as an "electricity valley." He says, "With the second cheapest electricity in the world, we are able to create an Electrical Valley in South Africa—not unlike California's Silicon Valley—that will attract high-energy consumption industries to the region." Investors increasingly view it as the gateway to other markets in the region and beyond.
The changes sweeping across South Africa are slowly becoming evident in the country's educational system, which is undoubtedly the engine for sustainable growth and racial harmony. Even though the majority of blacks remain in poorly funded township and rural schools, those schools are now being upgraded. A small percentage of the children of the emerging black middle class, along with some of poorer parentage, are now being educated in private schools and formerly white public schools.
One undesirable fallout from the transitional process is a rising crime rate. Hordes of people who previously skirmished with the apartheid regime are now "out of work" and have turned to crime. There has not yet been a significant decrease in black unemployment under the new government. The unemployment rate among black South Africans is about 30 percent.
For South Africa, it has been a long and painful trek to where it is now—at the threshold of greatness. Now is its time. South Africa, the prodigal son, has returned, and its father, Nelson Mandela, is inviting the world community to a welcome banquet. The party theme is `Bring Your Own, Show and Tell.' While some tender excuses, others are streaming in. Other African countries seem to be waiting for crumbs to fall their way. They could do better than that. They could at least begin to prepare their own side tables and implore party guests to crane their necks and take a look.
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* Nena Uche is a freelance journalist and ATF Contributing Editor. She can be reached at 1 Chauncy St., #8, Cambridge, MA 02139.