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It's Crunch Time In South Africa

International International Business


South Africa's Government of National Unity is about to show its electorate--and the rest of the world--just how adept it is at juggling. The display is set for June 22, when Pretoria presents its first budget to the new Parliament. Skeptical investors will be watching carefully for signs that the government can keep its promise to maintain fiscal discipline. And South Africans, from trade unionists to township residents, will be looking for signs of progress in healing the country's deep social ills. The tough job of governing in the new South Africa has begun.

For investors, the preelection "wait-and-see" mood has yet to lift. Political stability has held in the weeks since the election, but that's apparently not enough to bring the surge of foreign investment that the economy ultimately depends on for sustained growth. Indeed, investment flows have been sluggish since the historic Apr. 27 election, way short of optimistic forecasts. One high-profile name, PepsiCo Inc., announced plans to return, paying $20 million for a 25% stake in a joint venture with a group of black entrepreneurs. And Ford Motor Co. is considering plans to return, as well.

But most international investors want more reassurance that the country is under sound management. At a mid-June powwow of international executives and money managers in Cape Town, Frank Savage, chairman of Alliance Capital Management International in New York, spelled out his investment "wish list." Atop was a noninflationary budget. That's crucial, since South Africa's foreign exchange reserves continued to sink, falling this year from $2.5 billion to less than $2 billion. Warns newly reappointed Reserve Bank Governor Chris Stals: "The deficit should be reduced. Government debt...will become excessive very, very soon."

But the new government's dominant party, the African National Congress, is under growing pressure to begin delivering on election promises. The powerful Congress of South African Trade Unions (Cosatu) is perturbed at the talk of cuts rather than increases in public services. The health ministry, for one, which wants to introduce a new primary-care system, is being pressed to accept a 4% real spending cut.

PLENTY OF ADVICE. The immediate crunch comes because ANC leaders vowed to the International Monetary Fund and other financial watchdogs that they wouldn't boost the budget deficit beyond this year's 6% as a proportion of gross domestic product. What's more, costs incurred during the dying days of apartheid total as much as $1.4 billion. These include the huge expenditures for the election itself and the costs of integrating the old South African Defense Force with the ANC's guerrilla army. Together, these items will add two percentage points to whatever the deficit turns out to be, even if the country posts the 3% growth it's counting on this year.

In South Africa's newly emboldened body politic, though, there's no shortage of advice. Business and the former National Party rulers, less affected by popular pressures, want to see lower taxes and the privatization of some state-owned enterprises to reduce the national debt. Cosatu advisers, meanwhile, want to treat the transitional costs as a one-time "extraordinary item." They figure that the new government has only a brief window to show that it has begun the process of delivering some material improvements to the black majority. A failure to do so could undo the hard-won efforts to build stability. Whichever way the new government turns, it's bound to raise someone's hackles.Alan Fine in Johannesburg

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