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This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

From 9 August 1985, Financial Times, Alexander Nicoll, "Short-term debt Pretoria's Achilles heel"

SOUTH AFRICA's ability to fulfil its financing needs abroad has inevitably been thrown into question in recent weeks.

Declaration of a state of emergency has provoked a suspension of new investments by France, as well as mounting calls for official sanctions in other countries. Just as noticeable for the foreign banks upon whom South Africa depends has been Chase Manhattan Bank's decision -- upon which the bank has officially refused comment -- to phase out lending to all South African borrowers.

Even before the latest crisis, there was a disturbing outflow of short-term capital from South Africa -- believed to have been renewed amid the recent weakness of the rand and the Johannesburg stock market.

Political considerations aside, South Africa's economic and financial position would not seriously threaten its impeccable debt repayment record and ability to raise new funds.

International bank economists estimate the country's total foreign debt at between $19bn and $20bn, a relatively modest amount, and the debt service ratio on traditional definitions at a respectable 10 to 11 per cent. More than half of the total debt, however, and by some calculations as much as two-thirds, falls due within a year.

So far, the country has had no difficulty in securing access to international capital markets. The chief threat to its financial stability must nevertheless be a collapse of confidence among banks who would consequently refuse to extend the short-term lines of credit upon which the country clearly depends.

Worries about dependence on short-term debt are effectively countered by a healthy current account. The balance swung into a surplus of R1.3bn (£429m) in the first quarter and is officially forecast to show a similar performance for the remainder of the year, producing a 1985 surplus of some R4bn against a deficit of R1bn last year.

The first quarter performance was aided by strong exports, resulting partly from a weaker rand, a rise in gold output (accounted for separately from exports), and stagnant imports because of the downturn in consumer spending amid the economy's downward adjustment. The weaker rand raised the rand value of debt service payments, increasing net service payments.

The performance of the broader capital account has not been so encouraging. In 1984, short-term net capital outflows of R3bn only just exceeded net long-term capital inflows of R2.7bn. But the short-term flows were accelerating rapidly at the end of the year, and this trend continued into the first quarter.

Long-term inflows, mostly purchases of securities listed in Johannesburg, totalled R366m, but short-term outflows rose to R2.79bn including R2.87bn from the private sector.

The Reserve Bank argued that this was due to repayments of short-term foreign debt and to increases in foreign short-term claims as a result of rising exports. But economists doubt this explanation, especially as they have no evidence that short-term debt has been reduced.

Capital outflows halted in the second quarter, allowing a recovery in net gold and foreign exchange reserves. But they are said to have resumed in July.

A flight of private capital, through having detrimental effects on the economy, should not immediately affect the country's foreign borrowing requirement. South Africa argues that this is diminishing, with the Government stepping up its dependence on borrowing in the domestic market, and state bodies such as Escom, the electricity company, needing less finance because they have fewer new large-scale projects.

The chart shows, however, that bond issues by South African borrowers have if anything been increasing. Economists are unconvinced that this activity represents simply the replacement of short-term funding.

Many U.S. banks have been forced by domestic political pressure to cease lending to the South African public sector, but most have been reluctant to extend the ban to the private sector as well.

Some banks in the U.S. and elsewhere are believed to have reduced the total amounts they are prepared to lend to the country, while others may be failing to replace exposure as loans fall due. So far, however, there has been no evidence that the country's borrowers have had difficulty in replacing short-term credit lines.

The introduction of sanctions is unlikely to change the pricture. A cut-off in new investment would take many years to work through to the economy to the extent that, for example, old plant would have to be replaced. A ban on krugerrand sales would have little impact on gold sales overall, and could even stimulate worldwide interest in gold because of investor interest in U.S. and Canadian-made coins.

Foreign banks' confidence could be sapped by a marked deterioration in the domestic economy, particularly if this were to affect the health of the South African banks

In this context, banks must view with some concern the boycotts on retailers which is part of the current unrest. A gold miners' strike or a rapid exodus of private capital could cause similar and more immediate consternation amongst banks.

Some economists believe the Government must already have taken steps to counter such possibilities, perhaps with quiet words to friendly bankers likely to offer to maintain their lines, come what may.

Mr Barend du Plessis, the Finance minister, recently visited London and has been at pains to reassure foreign banks about the country's borrowing needs as well as its economic health. In the last resort, the Government does have a further armoury of measures: it could reimpose foreign exchange controls, though this would be seen as an admission of a problem; it could increase the prescribed amounts which South African institutions are required to invest in government paper; or it could undertake gold swaps.

This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. Return to the Nelson Mandela Centre of Memory site.