The Origins and Implications of South Africa's Continuing Financial Crisis

Literature › Works

Alan Hirsch (1989). The Origins and Implications of South Africa's Continuing Financial Crisis. Transformation 9.

Type	journal article
Scope	Economics and economic history of apartheid
Method	mixed
Period studied	1970–1989
Regions	South Africa, United States, United Kingdom, West Germany, Switzerland
Themes	macro fiscal finance debt, sanctions divestment, business and state, politics ideology elections, transition post apartheid
Citation key	hirsch1989

Argument

Hirsch argues that the 1985 debt crisis stemmed from structural balance-of-payments dependence on capital inflows, combined with heavy short-term interbank borrowing, a falling gold price and a collapsing rand, and was not merely the Reserve Bank's carelessness. The crisis persists because South Africa must run current-account surpluses to service debt, so the government must switch off every economic boom. Creditor banks' withdrawal was partly politically driven, and anti-apartheid campaigns politicised the debt negotiations. Hirsch argues against Lipton and Kaplan that external financial pressure, to which sanctions contributed, has pressured the regime. He also argues against liberal incrementalists that economic weakness rather than growth can push the state toward serious reform, drawing on Latin American parallels.

Evidence and method

Reserve Bank Quarterly Bulletin debt tables, OECD financial statistics, Economist Intelligence Unit data, financial press (Financial Mail, Euromoney, Financial Times, New York Times, Business Day), Citibank reports, Nedbank and Reserve Bank bulletins, ICABA bulletins, CANNICOR Research reports, and secondary literature (Harris, Padayachee, Martin, Lind and Espaldon).

Place in the debates

• Causes of the 1985 debt crisis (Reserve Bank mismanagement versus structural/political causes) (see Finance, capital flight, the 1985 debt crisis and banking). Grants that weak Reserve Bank oversight and over-liberalised borrowing contributed, but locates the roots in structural balance-of-payments dependence, the gold price and rand collapse, and political unrest.
• Sanctions effectiveness (see Sanctions, disinvestment and the anti-apartheid movement). Argues that external economic and financial pressure, including sanctions, has pressured the regime. Financial sanctions work mainly by making business harder and costlier rather than by cutting off supplies completely.
• Liberal incrementalism: does growth precede political reform? (see Liberal vs revisionist: was apartheid functional or dysfunctional for capitalist growth?). Rejects the incrementalist view; economic vulnerability and weakness, not growth, can force the state into serious reform.

Findings

• Short-term debt rose sharply as a share of total foreign debt before the crisis, driven by lender fears and political sensitivities. (p. 3)

  short-term debt rose from 49 percent of total debt in 1980 to 72 percent in 1985

• Interbank lending let politically sensitive US lenders disguise their South African exposure. (p. 3)

  lending to South Africa through the interbank market provided a near perfect disguise, since transactions through the interbank market are never published

• The rand depreciation inflated the domestic-currency burden of dollar debt, which rose to half of GDP. (p. 7)

  the continuing depreciation of the rand took the debt up to 50 percent of its GDP at about the time that South Africa stopped payment on short-term debts

• Reserve Bank oversight of foreign borrowing was weak. (p. 8)

  The Reserve Bank's reporting systems were inadequate. Its free market philosophy seemed to extend to its not requiring information

• US banks were heavily exposed through short-term interbank lending, unlike British and German banks. (p. 9)

  By August 1985 interbank lending made up roughly two-thirds of all US bank lending in South Africa, and 85 percent of all US loans to South Africa were short-term.

• Botha's Rubicon speech triggered the rand collapse and the closing of the exchanges. (p. 9)

  The following morning the rand fell by 20 percent on the Johannesburg foreign exchange market. On August 27 the rand reached a record low of $0.35

• The moratorium covered most of the short-term debt, with trade credits and government-guaranteed loans excluded. (p. 10)

  the repayment of the principal of a large part of the debt, $10-billion of the $14-billion that was short-term, was suspended until December 30

• Business groups responded to the crisis with reform proposals, but retreated when the government reimposed a comprehensive Emergency. (p. 13)

  South African business groupings responded to the crisis with unusually extensive reform proposals, and were eventually followed by the government which promised several reforms in January 1986.

• Trade credits are the major remaining channel of foreign finance, and cutting them would be a very effective sanction. (p. 16)

  If the world banking community should effectively exclude South Africa from international trade and payment systems, it would be a much more effective sanctions measure than trade sanctions applied by governments.

• Capital outflows persisted after 1985, constraining growth. (p. 18)

  The capital account continues to lose the equivalent of 4 percent of the GDP annually, making up a net outflow of about R25-billion since 1985.

• The Reserve Bank governor linked economic prospects to political reform. (p. 18)

  If the current rate of capital outflow continued, he warned, South Africa could expect a GDP growth rate of no higher than 2 percent

Evidence ledger

Sources used

Source	Kind	Period	How used
South African Reserve Bank Quarterly Bulletin, December 1987 (foreign debt series, Table 1)	official statistical series	1980-1987	Supplies total foreign debt in US$ and rand, debt as % of GDP, and short-term debt share, which anchor the account of the debt build-up.
Pamela Freer, South Africa into the 1990s: Growth for Survival (EIU, 1986), foreign liabilities structure (Table 2)	secondary literature compilation	1970-1984	Provides the percentage composition of foreign liabilities showing the shift from equity to loans.
OECD Financial Market Trends, Vol 27, March 1984; OECD Financial Statistics Monthly, 1987, No 10 (international borrowing data, Table 3)	international trade or finance data	1974-1987	Shows the shift from medium/long-term bank loans to bonds and the absence of publicly recorded issues after 1986.
Euromoney International Bond Annual 1985 and International Capital Markets Annual 1986 (league tables of lead-managers)	newspapers periodicals	1982-1985	Shows that German and Swiss banks led South African international bond issues before the crisis.
Euromoney articles and supplements (Dec 1985, Dec 1986, Mar 1987, Dec 1987, Apr 1988, Special Supplement 'South African Banking')	newspapers periodicals	1985-1988	Source for Nedbank's interbank borrowing, Reserve Bank oversight failures, bank executives' and Stals's remarks, trade credit secrecy, and rolled-over debt estimates.
Financial Mail (various issues 1985-1988)	newspapers periodicals	1985-1988	Reports on Nedbank's borrowing, Reserve Bank forward-rate policy, gold price and rand movements, and the Eskom loan search.
Citibank (1985) 'South African rand' (undated report, circa March 1985)	company records or reports	c. March 1985	Contemporary bank assessment showing Reserve Bank neglect of debt maturity structure and the use of gold swaps.
ICABA (International Confidential Anti-apartheid Bank Analysis?) bulletins, issues 3/1986, 4/1987, 5/1987-88, 6/1988	newspapers periodicals	1986-1988	Used for parastatal borrowing, moratorium terms, credit rating decline, the 1987 agreement, and German/Swiss bank exposure.
New York Times and Wall Street Journal (various issues, Aug-Sept 1985; July 1988)	newspapers periodicals	1985-1988	Documents the sequence of US banks refusing to roll over loans in August 1985 and later debt-repayment fears.
Financial Times and International Financing Review (1986-1987 reports on rescheduling negotiations)	newspapers periodicals	1986-1987	Source for the interim agreement terms, technical committee composition, negotiation breakdowns, and the bankers' economists' mission.
Lind and Espaldon (1986) 'South Africa's debt at the time of crisis' (CANNICOR Research)	secondary literature compilation	1980-1985	Provides the shares of short-term and interbank lending in US, British and German bank exposure.
Lind and Koistinen (1988) Financing South Africa's foreign trade (CANNICOR Research)	secondary literature compilation	1988	Source for the estimate that about $3bn of $10-12bn annual trade credits is insured by government export credit agencies.
Nedbank Bulletin / Guide to the Economy (Aug and Nov 1987) and SARB Quarterly Review (March 1988)	official statistical series	1987	Evidence that net capital inflows and new public corporation loans resumed in 1987 despite no public issues.
ASSOCOM (1988) 'Report on an ASSOCOM mission to Israel, Washington DC, and Europe, June-July 1988' (confidential)	employer association records	1988	Shows business organisations warning the government to encourage political change to avoid further sanctions.
Spindler (1984) The Politics of International Credit; Stamberger Institut (1986) 'The economic impact of sanctions against South Africa'; US Dept of Commerce (1988); Wilson (1986) The Chase	secondary literature compilation	1977-1988	Used for German Hermes credit guarantee ceilings, German investment data, US loan ban exemptions and Chase's history.

Inference

Quantification: Descriptive tables.

Narrative analytic history of the 1985 debt crisis built from a few published debt tables, financial press, bank reports and interview-like executive quotations. It links the balance of payments constraint to political pressure via chronological process-tracing, with a comparison of creditor-country behaviour (US/UK vs German/Swiss), and argues by theory and analogy to Latin America.

Key claims

Claim	Basis	Strength
Short-term debt rose sharply from 49% of total foreign debt in 1980 to 72% in 1985 and foreign debt reached 50% of GDP, creating vulnerability before the crisis. (p. 33)	SARB Quarterly Bulletin Dec 1987 (Table 1) and Freer/EIU (Table 2), descriptively summarised.	Systematic data
The overborrowing was partly caused by weak Reserve Bank oversight and interest rate differentials that induced banks to borrow short abroad and lend long at home. (p. 38)	Euromoney, Financial Mail and Citibank report quotations from bankers and the Reserve Bank governor; no bank-level data.	Illustrative or anecdotal
US banks acted first and had shifted most into short-term loans, indicating the debt crisis was politicised by anti-apartheid pressure, not only credit risk. (p. 42)	Lind and Espaldon shares of short-term lending, press reports on Chase Manhattan, and inferred motive.	Partial data
After the crisis, German, Swiss and other continental European banks became relatively more important creditors, while US and UK banks were repaid soonest. (p. 45)	Euromoney league tables, ICABA bulletins, bank executive quotes; no systematic exposure data.	Partial data
Despite zero publicly recorded loans since 1986, South Africa retained covert access to finance via interbank loans, rollovers, gold swaps and especially trade credits. (p. 43)	Table 3 (OECD), Nedbank/SARB reports on net inflows, Euromoney quotes, leaked Toronto Dominion documents; extent of trade-credit conversion admitted unknowable.	Partial data
The 1987 rescheduling was gentle because pressure had eased, and the debt remained about $22 billion in 1989 with capital outflows of about 4% of GDP annually. (p. 48)	ICABA, Financial Times and press reports; Reserve Bank and Finance Week figures cited without detailed series.	Partial data
Economic vulnerability rather than growth can force the state into reformism, and financial pressure may be a lever against apartheid. (p. 3)	Chronology of business reform proposals and state responses, Latin American analogies, business and Reserve Bank statements; no systematic test.	Asserted

The author's caveats

Notes that the borrowers and creditors keep transactions secret, that banks gave no detail in surveys, and that it is impossible to say how much trade credit is being converted into loans. Table 3 covers only publicly revealed borrowing.

Gaps in the evidence

The argument that politics shaped creditor behaviour would need bank-level lending and rollover data by creditor country and date, which was held confidentially by the Reserve Bank and banks and has since become partly available. Reserve Bank and treasury archives and interviews with negotiators could test the motives and the claimed link between financial pressure and reform. The business and state reform claims need documentary evidence from business associations and cabinet records, and comparison with periods of political unrest without debt problems.

Replicability: Data poorly documented.