South Africa's External Debt Crisis¶

Laurence Harris (1986). South Africa's External Debt Crisis. Third World Quarterly, Vol. 8, No. 3. Taylor & Francis.


Type	journal article
Scope	Economics and economic history of apartheid
Method	policy analysis
Period studied	1960–1986
Regions	South Africa, London, New York
Themes	macro fiscal finance debt, sanctions divestment, business and state, politics ideology elections, resistance social movements
Citation key	`harris1986`

Argument¶

Harris narrates the debt crisis from the July 1985 State of Emergency to the 20 February 1986 London meeting that agreed the Leutwiler plan in principle. He argues that the crisis was triggered by political events but cannot be understood as purely political. South Africa's debt structure (short-term, inter-bank, privately borrowed), recession, falling gold prices and exchange-rate policy predisposed it to crisis. Banks acted on normal financial criteria (protecting assets, protecting the inter-bank market), not mainly to push for reform. He concludes that no durable rescheduling is possible while apartheid persists, so the debt issue will recur and could become a de facto financial sanction.

Evidence and method¶

Contemporary press reports (Financial Times, Guardian, Business Day, Star, Sunday Times and others), speeches by Botha and the Finance Minister, South African Reserve Bank Quarterly Bulletin data, Old Mutual Economic Monitor, and the author's earlier work on the City of London.

Place in the debates¶

Was the 1985 debt crisis wholly political or also economic? (see Finance, capital flight, the 1985 debt crisis and banking). Rejects the 'political only' view held by many commentators and bankers; argues political factors triggered it but economic imbalances (short-term debt, recession, gold price fall) predisposed it and partly caused it.
Sanctions effectiveness / were banks acting politically? (see Finance, capital flight, the 1985 debt crisis and banking). Argues banks followed financial criteria (asset protection, inter-bank market stability) rather than political objectives, and cooperated with Pretoria; their pull-out was secondary to wider political shifts, but future debt pressure may become effective financial sanctions.
Can political reform stabilise finances? (see Finance, capital flight, the 1985 debt crisis and banking). Holds that reform cannot guarantee the stability bankers seek and may intensify popular struggle, so debt cannot be settled before majority rule.

Findings¶

The 1985 crisis was triggered by creditors' reaction to the State of Emergency rather than by an export-earnings shortfall. (p. 3)

In 1985 the debt crisis emerged not because of an immediate shortage of export earnings with which to service the debt, as with many other economies, but because of foreign creditors' reactions
The July 1985 emergency and French restrictions caused a stock market and rand crash. (p. 4)

In the week after the emergency measures were announced the market value of shares on the Johannesburg Stock Exchange fell by 11 billion rand
The Rubicon speech failed to deliver reform and the rand fell sharply, deepening the crash. (p. 6)

the rand fell by 20 per cent on the Johannesburg foreign exchange. It declined from 45.3 US cents to 38.5 cents before recovering to 42 US cents.
The debt freeze covered about $14bn of short-term bank debt, with a two-tier (commercial/financial) rand to curb capital flight. (p. 8)

The debt freeze applied to loans through the banks, suspending repayment of $14 billion of short-term bank debt.
The gold price and manufacturing collapse in the early 1980s and the resulting deficits underlay the crisis. (p. 15)

The world price of gold dropped from its record of $850 per ounce to below $300 at one point in early 1985.
The debt structure had become heavily short-term and unstable. (p. 16)

the ratio of interest payments to dividend payments abroad was 17 per cent in 1965-9, it had risen to 81 per cent in 1980-83
Short-term debt exceeded long-term debt, and about 60% of foreign debt was private, contracted via inter-bank lending. (p. 16)

at the end of 1984 short-term debt (with an original maturity of less than one year) was $14.0 bn while longer-term loans outstanding were $10.3 bn.
Banks behaved according to normal financial criteria rather than political aims. (p. 18)

The banks' behaviour has been consistent with the pursuit of their normal financial criteria rather than political objectives.
The Leutwiler plan agreed in principle delayed repayment of some $10bn of frozen debt, with a $0.5bn down payment. (p. 13)

there would be a further year's extension before repayment of some $10 billion of frozen short-term debt was required.
No sustainable long-term rescheduling is possible under apartheid; agreements are temporary. (p. 21)

There is no sense in which a rescheduling or restructuring can be achieved which would put the apartheid economy's external debt onto a new and sustainable footing.
Banks could have frozen South African assets abroad but did not, showing a bias toward maintaining ties with the regime. (p. 25)

South Africa's total foreign assets (not including the ships and aircraft mentioned by the clerics) were some $12.4 billion at the end of 1984.

Evidence ledger¶

Sources used¶

Source	Kind	Period	How used
South African Reserve Bank, Quarterly Bulletin, December 1985	official statistical series	1984-1985	Supplies data on the composition of foreign debt (private share, short-term versus long-term), the post-freeze repayments on exempted loans, and total foreign assets at end-1984.
Economic Monitor, Old Mutual, July 1985	company records or reports	1984-1985	Used with the Reserve Bank Bulletin for the claim that private borrowers accounted for about 60 per cent of foreign debt at end-1984.
Reserve Bank estimates of short-term and long-term foreign debt at end-1984 and 1983	official statistical series	1983-1984	Establishes the unbalanced debt structure (short-term $14.0bn versus long-term $10.3bn, worsening from 1983) as an economic precondition of the crisis.
Citizen (Johannesburg) 23 July 1985, Star (Johannesburg) 28 July 1985, Cape Times 29 Sept 1985, Business Day, Financial Mail, Daily Dispatch and other South African press	newspapers periodicals	July 1985-March 1986	Source for the chronology of the crash, stock exchange falls, rand movements, business reactions to the Rubicon speeches and the clergymen's letter to Leutwiler.
Financial Times (London), Guardian (London), Sunday Times, Daily Telegraph, London Standard	newspapers periodicals	July 1985-March 1986	Source for the debt-negotiation chronology, the terms of the Leutwiler plan, bankers' statements (Barclays), the Frost Sullivan risk downgrade, and the Reserve Bank governor's remarks.
Speech by Mr B du Plessis, Minister of Finance, 1 September 1985 (full text in Business Day, 2 September 1985)	parliamentary debates	1 September 1985	Establishes the terms of the debt freeze and the two-tier exchange rate and exchange control system.
R M Gidlow, 'Forward exchange policy in South Africa', South African Journal of Economics 53(3), September 1985	secondary literature compilation	1983-1985	Underpins the account of the Reserve Bank's spot-swap and forward market policy and its effect on exchange rate volatility.
J Coakley and L Harris, The City of Capital (1983)	secondary literature compilation	1983	Background on how the inter-bank credit market works.
Letter from Tutu, Naude and Boesak to Leutwiler, 8 February 1986	other	February 1986	Illustrates the alternative of freezing South African assets abroad, and its non-adoption by the banks.

Inference¶

Quantification: Illustrative figures.

Chronological narrative of events from July 1985 to February 1986, built on press reports and Reserve Bank figures. The argument that economic and financial factors, not politics alone, drove the crisis rests on a few statistics on debt structure, bank statements and reasoning about banking prudence. There is no systematic testing.

Key claims¶

Claim	Basis	Strength
The 1985 crisis was triggered by creditors' reactions to the State of Emergency and the French restrictions, and a stock market and rand crash followed, not by a shortage of export earnings. (p. 794)	South African press reports on share values and rand rates; commentary quoted from the Sunday Times.	Illustrative or anecdotal
South Africa's debt structure was unbalanced and unstable, with a high and rising short-term share, mostly private inter-bank borrowing, which predisposed it to crisis. (p. 807)	Reserve Bank estimates of short-term and long-term debt, interest to dividend ratios, and Old Mutual and Reserve Bank data on the private share.	Partial data
Banks' behaviour followed normal financial criteria (protecting assets and the inter-bank system) rather than a political agenda to end apartheid. (p. 809)	Press quotations of bankers' statements, risk consultancy rankings, and the author's reasoning about the inter-bank market; no bank records.	Illustrative or anecdotal
The February 1986 Leutwiler plan gave South Africa an extension of repayment of about $10bn of frozen short-term debt, with a $0.5bn down payment, a result favourable to the regime. (p. 804)	Financial Times and Guardian reports of the London meeting.	Partial data
Net withdrawal of credit after the freeze was not large, and the banks did not freeze South African assets even though foreign assets of $12.4bn could have covered the debt. (p. 815)	Reserve Bank Quarterly Bulletin (reserves down R1.5bn in Q3 1985, total foreign assets at end-1984) and inference from the size of those figures.	Partial data
Political reform promises such as Rubicon I and II were driven more by domestic rebellion than by creditor pressure, and the debt crisis was only a small element in the lifting of the Emergency. (p. 816)	Interpretive argument supported by press reports and an unpublished paper by Unterhalter.	Asserted
The economic backdrop of falling gold prices, manufacturing decline, austerity and rising unemployment weakened confidence before the political shock. (p. 806)	Cited figures on gold price, manufacturing output index, interest rates, inflation and a black unemployment estimate; the latter two are unsourced.	Partial data

The author's caveats¶

The author notes that inter-bank transactions are never published, and that it is not yet possible to assess how far new lending continued after the freeze, since inflows within net repayments are unknown. The black unemployment figure is described only as an estimate.

Gaps in the evidence¶

The argument would be better tested with bank-by-bank exposure and maturity data, BIS banking statistics and internal credit committee decisions, to separate political from prudential motives for non-renewal. Capital flow data by quarter, together with interviews with the bankers and officials involved, would also help. Much of this would have been confidential in 1986, though archives and memoirs may now be available. The economic-weakness claims lack systematic sourcing for the output, unemployment and profit figures.

Replicability: Data poorly documented.