New South African Review 1. Anthony Butler
of their total assets. They have diluted their South African identities and concequently the size of their supposed responsibilities towards the new South Africa and development there.
These corporations strenuously advocated lifting exchange controls and argued for their right to list offshore, the central point of these arguments being that they would then be able to raise capital more easily to invest in South Africa. Clearly, the opposite was true. As Roberts et al (2003, p.15) correctly argue, ‘In five of the last ten years outward direct investment has in fact exceeded inward FDI. Major foreign investments have largely been limited to the acquisition of stakes in state-owned utilities (Telkom and South African Airways) and the re-entry of firms such as Toyota and General Motors which had exited under sanctions, although specific examples exist of sectors where foreign companies have contributed to the resumption of growth.’
The unbundling of the conglomerates and the ‘rebundling’ should be considered in the context of the political and global factors affecting these businesses. The combination of the unease of white business with the changes in South Africa, and the understanding of the leaders of big business that they had to signal a willingness to share future business activities with black people, put two types of pressure on big business to restructure: The first was restructuring for political expediency; the second was directly linked to withdrawing from the South African economy. In other words, big business had adapted to the political changes by reducing its risk within the South African economy by internationalising operations. They have also accepted a political compromise to maintain their control over much of the South African economy by sharing a portion of ownership with black businesses.
Goldstein’s (2000, p.15) interpretation of this process is:
While the refocusing on core business has followed from the need to ensure competitiveness against the background of the opening of the domestic economy to world competition and weaker gold and commodity prices, voluntary unbundling has been an expedient strategy to appease the possible rise of nationalization sentiments. In order to build up a black capitalist constituency, it was important to conclude highly visible and large-scale deals. The first such deal was Sanlam’s sale of Metropolitan Life (METLIFE), an insurance company, to New Africa Investment Ltd (NAIL). In 1996 Anglo broke up its majority-owned sub-holding JCI (Johannesburg Consolidated Investment) into platinum (Amplats), a homonymous mining subsidiary, and an industrial arm, Johnnic.
Goldstein recognises that global and domestic factors shaped the behaviour of South African big business. His research indicates that the boom in mergers and acquisitions in South Africa during the 1990s was different to those in other countries and he shows that there were particularly South African characteristics to the M&As: the restructuring in South Africa was more about dismantling pyramid structures than increasing the competitiveness of industrial sectors. Goldstein says, ‘Of the twenty largest South African deals reported in 1992–98, 75 per cent corresponds to the simplification of the corporate structure; 10 per cent to consolidation in the financial industry; 10 per cent to foreign acquisitions; and only one deal – TransNatal’s acquisition of Rand Coal to form Ingwe Coal in 1994 – is a “genuine” South African merger (p.17).’ He makes the important point that it is remarkable that South African conglomerates have not made any large acquisitions in their own country, pointing out that this lack of acquisition is true even in sectors such as utilities and internet related investments ‘... where family-controlled business groups in OECD countries have been active even while refocusing their portfolios on the core business’ (ibid).
The South African context for mergers and acquisitions was one where the MEC continued to stifle investments into diversifying the industrial base of the South African economy. Instead, the concern of big businesses that dominated the MEC was to restructure in order to appear more attractive to investors speculating in the markets where they had relisted.
FINANCIALISATION OF THE SOUTH AFRICAN ECONOMY
The South African financial system had developed along similar lines to that of the English and US systems and can be described as market-based rather than bank-based (Roux 1991). In other words, South African businesses that require finance for long-term investment use retained earnings or seek finance in securities markets. The state-owned Industrial Development Corporation does provide some industrial finance but on the whole its lending is a very small share of total lending in the country and its main customers have been large, capital intensive projects in the mining and minerals sectors (Roberts 2008). The banks and other monetary institutions largely provided business with short-term operating capital and serviced the credit card, home mortgage, vehicle lease and finance and other short-term lending for consumption.
Figure 4 shows that during the period 1990 to 2008 this form of credit allocation continued in the economy. One can see the growth in mortgage advances from 2003 to 2008 which supported the growth of a housing price bubble in the relatively more affluent real estate market in South Africa. House price increases in South Africa were higher than in the US during the period 2003 to 2007, when US subprime lending was rampant. For the period 1990 to 2008, investment was a relatively very small share of total private sector credit extension.
An important phenomenon in the global economy and South Africa is that the size and influence of the financial sector grew from the 1980s, when financial markets and cross-border capital flows were liberalised. The market-based banking system and banking deregulation by the apartheid state during the 1980s supported the growth of the South African financial sector. Further, the political changes, the decline in MEC investments and trade liberalisation led to greater private sector interest in financial assets from the mid-1990s. Figure 5 shows that value added by the finance and insurance services sector increased rapidly during the 1980s when economic growth and investment as a percentage of GDP declined significantly. The contribution of the finance and insurance sectors to GDP grew even more rapidly from 1994 to 2007, while overall investment levels remained relatively low. An improvement in investment levels from 2003 included the impact of government’s infrastructure investments from 2006, increased services sector investment linked to financial sector growth, increased household consumption and more household construction and purchase of automobiles. In short, the growth of the financial sector and its increased share of GDP were not associated with higher levels of investment.
Figure 5: Private sector credit extension by all monetary institutions by type (percentages of total)
Source: calculated using SARB data
An important aspect of the financialisation of the South African economy during the postapartheid period was increased capital inflows, particularly short-term portfolio flows from developed countries. These short-term flows signalled not only the end of apartheid financial isolation but, more importantly, a change in sentiment about South Africa by global financiers, after they had ignored South Africa subsequent to its 1985 debt crisis. The slow liberalisation of exchange controls by the South African government from 1996 may also have affected this sentiment but the more important reason for the increased flows to South Africa was the huge increase in global liquidity that was accompanied by large movements of short-term portfolio flows into certain developing countries in Asia, Latin America and South Africa in Africa.
I argued in 2006 that the surge in net short-term capital flows to South Africa increased macroeconomic instability with more volatility in exchange rates, interest rates and inflation associated with changes in capital inflows (see Mohamed 2006). A stark illustration of this volatility and instability was the sharp drop in the rand to dollar exchange rate of 35 per cent in 2001, which could be defined as a currency crisis. This