International -- Int'l Business: SOUTH AFRICA
SOUTH AFRICA: `NOBODY WANTS TO STAY IN A WORLD OF PROMISES' (int'l edition)
Mandela's backers are getting impatient. So is business
It's reality time in South Africa. Pressure is building on President Nelson Mandela to deliver on the election pledges of his African National Congress to provide new housing, build better schools, and reduce the unemployment rate--now 40%--by creating jobs. After three years, even longtime ANC supporters such as welder Rodger Dumbu, 52, are getting antsy. "We are willing to wait," says Dumbu, who lives in a ramshackle hut near Cape Town. "But nobody wants to stay in a world of promises."
The 78-year-old Mandela will have a tough time making good on the ANC's pledges. His government is now at odds with much of the business community--over taxes and the future of the rand. At the same time, resources are tight. And they are likely to get tighter still after Finance Minister Trevor A. Manuel presents his budget on Mar. 12. The government aims to trim the budget deficit from last year's $6.4 billion, or 5.1% of gross domestic product, to 4% of GDP this year. To achieve that, say local analysts, Manuel will have to halve the 15% annual rise of spending.
The government's biggest challenge, however, will be to avoid a damaging run on the rand. Hints from Manuel and others have fueled speculation that the country's severe foreign-exchange controls will be eased. Old Mutual, the country's biggest insurer, for instance, says it might eventually move as much as 25% of its $45 billion in assets under management to London. The present limit on such overseas investment is 10% of assets. If Manuel dashes the hopes of business now, there could be a backlash. "We're setting ourselves up for a fall," warns South African Chamber of Business economist Penny Hawkins.
The rand may get pummeled anyway. Despite a first loosening of the rules in 1995, restrictions on foreign investment by companies and individuals are still strict. So a flight of capital could quickly follow even a modest slackening of controls. The rand could sink from its current 22.4 cents to 21.2 cents, says Tony Twine, a director of Johannesburg consultants Econometrix.
Business argues that relaxing the controls will pay off in the end--despite an initial currency depreciation--because it will boost outsiders' confidence in South Africa. Although foreigners can repatriate profits, interest, and dividends freely, the draconian regime imposed on residents is a psychological barrier. Currently, South African companies can invest abroad only with the Reserve Bank's permission. While institutions such as Old Mutual can move 10% of their portfolio out, they must find a foreigner to invest the same amount in South Africa.
Mandela can't afford a major clash with business. He needs all the help he can get to achieve growth to provide jobs and bankroll improved standards of living for the mass of voters. But lately, business executives have been chafing under tax burdens. Blacks are still fighting tax bills dating back to apartheid days that they consider illegitimate. Whites hate tax rates that reach 45% on incomes of $22,000. And as the government trawls for new revenues, unrest has spread from mixed-race townships near Johannesburg to predominantly white suburbs such as Sandton.
TAX STRIKE. Township riots in early February to protest alleged discrimination in rents, local taxes, and utilities left three dead. Amid Sandton's luxurious houses, the rhetoric is just as loud--even if the street violence is absent. Sandton residents are refusing to pay property-tax rate increases that tripled some tax bills. Commercial landlords such as insurer Liberty Life are trying to overturn the rate hikes in court.
In a strange twist, black businessmen, now joined by whites, are using precisely the same nonpayment tactics against Mandela that he and the ANC used in the days of apartheid. Tax and rent strikes are powerful political symbols in South Africa. But neither they nor spats about utility prices are going to topple Mandela's government, which has a 62% majority in Parliament.
All the same, the protests are a clear reminder of how much Mandela still has to do before his presidential term ends in 1999. He needs to lay out quickly both how he will raise standards of living for the masses and how the moves will be financed--without undermining business, investment, and growth. Unless he can turn his vision into a viable road map, it may never be realized.By Kathy Chenault in Johannesburg