Sanctions, Disinvestment, and U.S. Corporations in South Africa



Richard Knight


Authors Note

This chapter originally appeared in Sanctioning Apartheid (Africa World Press), 1990.  This book, edited by Robert E. Edgar, has a number of useful chapters and can be ordered online at  Type the book title in the search field.  The text here has been slightly edited and corrected, including in the number of states, counties and cities that had taken economic action against apartheid by the end of 1989 and targeted banks (including withdrawal of deposits and divestment) by the end of 1985.  Such counts are rough as the structure of legislation and action varied widely.


South Africa is now a democracy and no longer the target for sanctions and disinvestment.  The sanctions mentioned in this chapter, including those at the federal, state, county and city level, have all been lifted.  Some of the companies mentioned as divesting here have returned to do business in a democratic South Africa. — Richard Knight, April 2001


[Back to Bibliography]


[Home to]




Future historians may date mid-1984 as a turning point in the history of South Africa.  Massive protests inside South Africa combined with escalating pressure internationally to force substantial capital flight and perhaps the greatest challenge to the continuation of white minority rule in recent history.  In the five years since then, some 200 U.S. and more than 60 British companies have withdrawn from South Africa, international lenders have cut off Pretoria's access to foreign capital, and the value of the rand, South Africa's currency, has dropped dramatically.  South Africa's economic relations with the international community have been significantly altered.

This chapter will attempt to discuss the effects of sanctions and disinvestment over the last five years and highlight some of the continuing U.S. financial links to South Africa.  Finally, I will attempt to draw some conclusions as to the effectiveness of international attempts to pressure the white minority government through sanctions and disinvestment.[1]


The Political Context


Undoubtedly the greatest challenge to white minority rule came from the explosion of political resistance which followed Pretoria's introduction of a new constitution in 1983 with a complex set of segregated parliaments.  In a total rejection of apartheid, black South Africans mobilized to make the townships ungovernable, black local officials resigned in droves, and the government declared a State of Emergency in 1985 and used thousands of troops to quell "unrest."  Television audiences throughout the world were to watch almost nightly reports of massive resistance to apartheid, the growth of a democratic movement, and the savage police and military response.  This escalation of popular resistance sparked a dramatic expansion of international actions to isolate apartheid, actions that combined with the internal situation to force dramatic changes in South Africa's international economic relations.  U.S. corporate executives, who hoped that if they just held on for a few years apartheid would slowly disappear, were forced to face the reality of a long drawn out confrontation.  The writing on the wall spelled trouble ahead in South Africa and at home.  As a result, the agenda of South Africa's new State President, F. W. de Klerk, is dominated by efforts to counter the democratic movement and international pressures.


The U.S. Anti-Apartheid Movement


In the U.S., the long established movement to impose economic isolation on South Africa gathered dramatic momentum in this period.  Activists seeking to stop corporate collaboration with apartheid found the way blocked in Washington and had developed other strategies for exerting pressure on the corporations.  One major focus of this effort was the divestment campaign, aimed at moving individuals and institutions to sell their holdings in companies doing business in South Africa.  Already strong on the campuses across the U.S., new student protests surged after 1984 and the number of colleges and universities at least partially divesting jumped from 53 prior to April 1985 to 128 by February 1987 to 155 by August 1988.

The divestment movement was not limited to the campuses.  Concerned legislators and anti-apartheid activists built strong networks in cities and states and by the end of 1989 26 states, 22 counties and over 90 cities had taken some form of binding economic action against companies doing business in South Africa.  These activities include divestment by public pension funds of stocks of companies doing business in South Africa and pressure exerted via selective purchasing policies, whereby cities give preference in bidding on contracts for goods and services to those companies who do not do business in South Africa.

            All this local activity helped generate the thrust for a victory in 1986 when passage of the Comprehensive Anti-Apartheid Act was won over the veto of President Reagan.  What made the Congressional override more surprising is that it happened while the Republican Party controlled the Senate.  The Act banned new U.S. investment in South Africa, sales to the police and military, and new bank loans, except for the purpose of trade.  Specific measures against trade included the prohibition of the import of agricultural goods, textiles, shellfish, steel, iron, uranium and the products of state-owned corporations.  The Act has had some effect in cutting U.S. imports from South Africa, which declined by 35% between 1985 and 1987.  However, in 1988 U.S. imports from South Africa increased by 14% to $1.5 billion.  U.S. exports to South Africa increased by 40% between 1985 and 1988.  Some of the increase in U.S. imports may be due to lax enforcement of the 1986 Act.  A 1989 study by the General Accounting Office concluded that the US government had failed to enforce the Act adequately.  A major weakness of the Act is that it does little to prohibit exports to South Africa, even in such areas as computers and other capital goods.

            In 1987, the Budget Reconciliation Act included an amendment by Rep. Charles Rangel ending the ability of U.S. firms to claim tax credits in the U.S. for taxes paid in South Africa.  This effectively imposed double taxation on U.S. corporate operations in South Africa.  The sums of money involved are large.  According to the Internal Revenue Service, taxes involved in 1982 were $211,593,000 on taxable income of $440,780,000.  The U.S. Chamber of Commerce in South Africa has estimated that the measure increases the tax bill for U.S. companies from 57.5% to 72% of profits in South Africa.


Table 1

Trade with South Africa, 1985-1988 ($million)


US Exports

US Imports


















            In August 1998 the House of Representatives passed a new sanctions bill mandating the withdrawal of all U.S. companies from South Africa, the sale by U.S. residents of all investments in South African companies and an end to most trade, except for the import of certain strategic minerals.  The bill did not reach the Senate floor but the fact that such a sweeping bill got as far as it did alerted both the South African government and U.S. business that significant further sanctions were likely to be forthcoming.

            The impact of the anti-apartheid movement has clearly been felt by US companies.  It has significantly raised the cost of doing business in South Africa, adversely affecting corporate image, threatening the ability to raise capital and maintain domestic markets.  Gone are the days when, as in 1980, David Packard of Hewlett Packard stated, "I'd rather lose business in Nebraska than with South Africa."


U.S. Investment


            Some 200 U.S. companies have disinvested from South Africa in the last five years and U.S. direct investment has declined from $2.3 billion at the end of 1982 to $1.3 billion at the end of 1998.  However, many of those companies which have disinvested continue to do business through licensing, franchising, and distribution agreements.


            Despite the large number of corporate withdrawals and the prohibition of new U.S. investment, which came in effect in the fourth quarter of 1986, the value of U.S. direct investment in South Africa actually increased between 1985 and 1987.  However, the basic trend is down.  A number of major disinvestment took place in 1989, very likely bringing direct investment below $1 billion.[2]



Table 2

US direct investment in South Africa by type of industry

($ million)





































































































S = suppress.  Direct investment is a measure of the value of the foreign subsidiaries and associates of U.S. companies.  Department of Commerce figures include only those companies whose ownership goes directly from the US to South Africa.  Not included would be a company which has a subsidiary in a third country, which in turn has a subsidiary in South Africa.

Source: U.S. Department of Commerce



A Vulnerable Economy.


            Not only are U.S. corporations disinvesting, but, as the accompanying table shows, those of many other countries as well.  Since mid-1984, South Africa has suffered considerable capital flight, as a result of corporate disinvestment and because of the repayment of foreign loans.  Net capital movement out of South Africa was R9.2 billion in 1985, R6.1 billion in 1986, R3.1 billion in 1987 and R5.5 billion in 1988.  This trend is continuing, with R1.7 billion in capital outflow in the first two quarters of 1989.  One effect of this capital outflow has been a dramatic decline in the international exchange rate of the rand.  This means that imports are increasingly expensive.  It has also helped fuel South Africa's inflation rate, which at 12-15% per year, is much higher than its major trading partners.

            The South Africa government has attempted to limit the amount of capital outflow.  In September 1985 it imposed a system of exchange control and a debt repayments standstill.  Under exchange control, South African residents are generally prohibited from removing capital from the country and foreign investors can only remove investments via the financial rand, which is traded at a 20% to 40% discount compared to the commercial rand.  This means companies that disinvest get significantly fewer dollars for the capital they withdraw.3

            Few argue against the thesis that the South African economy was developed with foreign capital.  This was especially true of the gold mining industry, which is central to the apartheid economy.  Most South African economists agree that without foreign capital, South Africa will not be able to fund the necessary imports for economic growth at more than a marginal rate.  This is because in order for the economy to grow, South Africa must import capital goods and other inputs for production.  Currently it has difficulty in paying for everything it wants to do.  The modest economic expansion in the South African economy in the first half of 1988 put such a strain on the current (trade) account, that in August 1988, Pretoria slapped a hefty surcharge on capital goods imports.  At the same time, the government increased fuel prices by 15%, despite the fact that the world price for petroleum has been dropping.  If South Africa had a net inflow on the capital account (especially loans and investment), it would be able to fund the necessary imports for economic growth.


Table 3

Cumulative disinvestment from South Africa and/or

Namibia, with number of corporations at end of 1987

























West Germany








  Norway, Sweden,




























Source: Business International, based on UN Economic and Social Council E/1988/23, 8 February 1988.  The figures in this table do not match those cited in the text for several reasons, including that of time period covered.



            South Africa needs not only foreign capital but also foreign technology.  South Africa imports 95% of all computer equipment, and could not build a car, truck, or other sophisticated item without imported technology and components.  While some South Africans have talked of a "siege economy," in reality South Africa is heavily dependent on foreign input.  The South African Board of Trade and Industry notes that although import replacement has long been government policy, merchandise imports as a percentage of gross domestic product has only declined from 20% to 19% between 1960 and 1986.  South Africa's economy is simply not large enough to develop high-tech products.  Even the mining industry depends on capital goods imported from the U.S. and other countries.  Henri de Villers, chairman of the Standard Bank Investment Corp., put it succinctly. "In this day and age there is no such thing as economic self-sufficiency and we delude ourselves if we think different… South Africa needs the world.  It needs markets, it needs skills, it needs technology and above all it needs capital."


A Way to Go


            U.S. investment in South Africa is clearly not at an end.  More than 130 U.S. companies still have subsidiaries in South Africa.  And products of U.S. companies are available via licensing, franchising, and distribution agreements.  As a result, U.S. companies and their products are found across the spectrum in South Africa.  Supermarkets in South Africa often look like supermarkets in the U.S. with Kellogg's cereals, Colgate toothpaste, and Coca-Cola.  South African miners use continuous miners, drill bits and other equipment from such companies as Joy Technologies, Baker Hughes, and Dresser Industries.  The chemical products might well come from American Cyanamid Co. or E. I. Du Pont de Nemours and Co.  Computers come from IBM and Hewlett-Packard.  A person reading a magazine will see advertisements designed by J. Walter Thompson.


Petroleum Industry

            Nowhere is the strategic nature of U.S. investment in South Africa more clearly shown than in the oil industry.  That remains the case today, although several U.S. companies, including Mobil, have disinvested.  For many years the largest U.S investors in South Africa were Mobil and Caltex (a joint venture of Chevron and Texaco).  In 1995, U.S. petroleum companies (primarily Mobil and Caltex) had a net income after taxes of $75 million, approximately one-half of all U.S. non-bank affiliates in South Africa.

            Caltex Petroleum Corp., the U.S. parent of the Caltex group of companies, is 50% owned by Chevron Corp. and 50% owned by Texaco Inc.  Up-to-date information on Caltex is difficult to come by as the company is extremely secretive about its operations in South Africa.  Caltex is estimated to have $350 million in assets in South Africa, and is reported to service 1,185 filling stations, of which some 393 are company owned. These filling stations give Caltex a 20% share of the South African market.  In 1980 Caltex Oil (SA) (Pty.) Ltd. had 2,257 employees or 17% of Caltex's employees worldwide.  Caltex operates a 100,000 barrel per day refinery, which represented about 6.3% of the company's world-wide capacity in 1980.  Caltex owns 34% of South African Oil Refinery (Pty.) Ltd., a 3,000 barrels per day lube oil refinery.

            The U.S. presence in the South African oil industry would be much larger if it were not for the effort of the antiapartheid movement.  Ashland Oil sold all its South African operations in mid-1986.  For a short time, Ashland had maintained licensing and distribution agreements, including the sale of $300,000 a year in Valvoline products.  However, when faced with the possible loss of a $12 million contract with the City of Los Angeles, Ashland quickly terminated its ties to South Africa.  "Our relationship with Los Angeles was clearly more important than our small and somewhat limited relationship with South Africa," said Ashland corporate attorney John Biehl.

            In 1989, Mobil Corp., which had over $400 million in assets in South Africa, disinvested.  Because of its strategic involvement, Mobil has been one of the foremost targets of the anti-apartheid movement.  Mobil has also headed the corporate efforts to oppose sanctions and disinvestment.  Mobil's disinvestment is a major victory for the U.S. anti-apartheid activists.

U.S. oil companies have claimed in the past that they were not responsible for the actual importation of oil into South Africa, which is done by the government, but they did refine and market petroleum.  The U.S. companies, combined with the UK company British Petroleum and the UK/Netherlands company Royal Dutch/Shell, refined the vast majority of petroleum used in South Africa.

U.S. oil companies have never denied that they sell to the South African police and military.   The get around the U.S. government restrictions prohibiting sales to the police and military because the oil they sell is South Africa has not been exported or reexported from the U.S.  Justifying selling oil to the police and military has not been a problem for U.S. oil companies.  As recently as 1981, Mobil told its shareholders: "Total denial of supplies to the police and military forces of a host country is hardly consistent with an image of responsible citizenship in that country.  The great bulk of the work of both police and military forces in every country, including South Africa, is for the benefit of all inhabitants."

The oil companies have been out in front as companies attempting to present an image of opposition to apartheid.  Shell took out advertisements in the Weekly Mail, an "alternative" newspaper in South Africa, saying it is for a free press.  Mobil had been one of the leading companies behind the Sullivan Principals, and, after the abandonment of the principals by the Reverend Sullivan, the principles' rebirth as the "Statement of Principals."


Motor Industry

            South Africa's reliance of foreign technology is clearly demonstrated in the motor industry.  There is no such thing as a "South African" car.  Despite years of a "local content" program, 40% to 50% of the value of input into cars produced in South Africa is imported.  Two of the largest U.S. investors, Ford and General Motors, have withdrawn from South Africa but their products continue to be made in South Africa under license.  Ford vehicles have long been sold to the police and military.  In 1986, in its last proxy statement before ending ownership in South Africa, Ford stated that if it ceased sales to the police and military in South Africa, it would lose all government sales and no longer be economically viable.  Ford has made it clear that although it no longer has any ownership, it is going to continue to provide not only the design, but the management and retooling assistance, without which, Ford maintains, the South African operations would likely not be able to continue.

            General Motors (GM) had made a loss in South Africa for several years prior to its withdrawal.  Now GM cars are made under license by its former subsidiary renamed Delta Motor Corp., which now also assembles Isuzu trucks.

            Early in 1988, as international pressure on companies doing business in South Africa continued to grow, the Japanese company Toyota announced that it would limit the number of cars made in South Africa.  South African motor companies, recognizing their own vulnerability and the danger of increasing pressure on their suppliers, recently agreed to suppress sales data, the publication of which, they said, was aiding advocates of sanctions.  "With sales rising, SA companies don't want to put more pressure on their Japanese principles.  Delta SA, for instance, represents Isuzu's second biggest market outside Japan," observes the Financial Mail.



            All U.S. computer companies have ended direct investment in South Africa, but almost all have continued licensing and distribution agreements.  U.S. mainframe computers represent almost 50% of the market.  South Africa is totally dependent on imported computers and South African businessman display increasing concern about the possibility of computer sanctions.  "Mainframe computers are only one of the items most vulnerable to sanctions and this cannot be replaced by a locally manufactured product," noted one South African business executive recently.  "This year we ware able to import computers but who knows what the situation will be next year."  Despite the U.S. ban on the sales of computers to the police and military, sales are not prohibited to any of the 1,000 private sector companies which handle 60% of military production in South Africa.

            Companies that no longer have ownership in South Africa, but continue to do business through distribution agreements include Amdahl Corp. (disinvested in 1987), Control Data Corp. (1988), Honeywell Inc. (1986), International Business Machines (1986), and Unisys (1988).

            International Business Machines (IBM) sold its South African subsidiary in October 1986.  The South African company was renamed Information Services Management (ISM) with ownership vested in an employee trust named ISM Trustees.  By October 1987 ISM had formed a joint venture with a large South African conglomerate, Barlow Rand, a company with close ties to the South African military.  This new company is called Technology Systems International (TSI).  ISM Trustees and Barlow Rand each own 28%, the remainder is publicly owned.  TSI has two subsidiaries, ISM and Reunert Computers, which had previously been a subsidiary of Barlow Rand.  The one, Reunert Computers, sells Japanese-made Hitachi IBM plug-compatible mainframe computers in apparent competition with IBM computers sold by ISM.  This ISM-Barlow Rand marriage appears to have been designed to circumvent sanctions.  Brian Mehl, managing director of ISM, commented, "What we've done with Technology Systems International is create the best of all worlds for our customers in that we've immediately created an alternative source — we've got IBM and we've got the leading IBM-compatible supplier."

            IBM products continue to play an important role in the South African computer market.  An estimated 40% of South Africa's installed mainframe computer base is of IBM origin, and the company had a 1985 market share of 20%.

            The terms of the Unisys disinvestment demonstrate the concern South African companies have about being cut off from the source of their supply.  In August 1988 Unisys sold its South African subsidiary to a local company, Mercedes Datakor, for R132 million.  Mercedes Datakor, which will continue as the Unisys distributor, insisted on some protections for itself from a possible future cutoff of Unisys products.  Unisys received only R82 million in cash immediately, the balance to be placed into a trust in Europe and paid to Unisys in quarterly payments over four years, provided Unisys continues to supply the South African company.  In addition, Mercedes Datakor demanded a ten-year distribution agreement, where the normal Unisys agreement needs to be renewed annually.  Such a long-term agreement makes it more difficult for Unisys to unilaterally stop supplying its products to the South African company.

            The disinvestment of Control Data Corp. in November 1988 was very similar to that of Unisys.  Control Data sold to a South African company.  Only 60% of the purchase price was paid immediately, the rest to be paid over five years, provided Control Data continues to supply its former subsidiary.  Control Data cited U.S. law prohibiting the financing of any expansion of its South African operations as the reason for its disinvestment.  Control Data retains the right to re-enter South Africa if conditions warrant.

            South Africa is dependent on the U.S. for computer software as well as hardware.  Most Japanese mainframe computers sold in South Africa are IBM-compatible and run IBM or other U.S. software.  Software from most major producers is distributed in South Africa.  The software they produce is central to the running of a modern economy.  In March 1987, ISM became the sole South African distributor for Hogan Systems, a U.S. company that specializes in software for banks.  Since Hogan runs on IBM mainframe computers, the use of Hogan by these banks helps hardware sales.  For example, Volkskas, which uses Hogan, recently purchased R60 million worth of hardware from ISM.

            This continued availability of software raises some interesting questions about the implementation of corporate decisions to distance themselves from apartheid.  Microsoft, the maker of the computer operating system MS-DOS and OS/2, announced in April 1986 that it had ended "direct shipment of software to the Republic of South Africa and terminated its relationship with its local distributor."  Yet clearly Microsoft products are available in South Africa, as without them no IBM or IBM compatible personal computers could operate.  Lotus Development Corp. has taken a stronger position and considers the use and sale of its software products in South Africa a violation of copyright.4



            Westinghouse Electric Corp. closed its South African office in 1987 but still has contracts with ESCOM for the Koeberg nuclear power plant.  In addition, Westinghouse has several distributors and licensees in South Africa, primarily for electrical equipment.

            The Motorola case is another victory for the anti-apartheid movement.  Motorola sold its South African operations to Allied Technologies (Altech), a South African electronic company.  Motorola products are now made under license in South Africa, including its highly regarded two-way radios.  However, as a result of pressure from municipal governments in the US, Motorola has announced that it would not renew its licensing agreements with Altech when they expire in 1990.


Sounding a Confused Retreat

            It is impossible in this chapter to look at each of the corporate withdrawals.  In general, where a manufacturing corporation with plant in place withdraws, the company sells its South African subsidiary either to local management or to a South African company.  In these cases actual disinvestment does take place and capital leaves South Africa, but in most cases the product remains through licensing and distribution agreements.  In some cases no actual disinvestment has taken place.  A number of companies have simply sold their all or part of their South African operations to European or other U.S. companies, frequently as part of a corporate restructuring.

            In seems that the basic trend of US companies disinvesting from South Africa will continue.  And as the number of companies declines, it will be increasingly difficult for those who remain to justify their continued presence in South Africa.  Some companies will sever all ties.  However, it is also true that many of those who withdraw from South Africa will continue to do business through non-equity ties.  This continued collaboration with the apartheid economy will be a focus of the US anti-apartheid movement.


Bank Loans


            South Africa's foreign debt increased significantly in rand terms between 1983 and 1985, although the increase in dollar terms was less dramatic.  By the end of 1984 U.S. bank loans had reached $4.7 billion, about 20% of South Africa's foreign debt.

            But as anti-apartheid pressure in the U.S. grew, an increasing number of U.S. banks modified their lending policies, some prohibiting loans to the South African government, others stopping all loans to South Africa.  By the end of 1985, fourteen states, eleven counties, and over 60 cities has adopted policies either withdrawing funds or limiting other business with banks making loans to South Africa.  The pressure to deny future loans was not taken seriously at that time by the South African government, but it made a major impact on the thinking of U.S. banks.  Banks were also concerned about the South African economy and by the rapid rise in South Africa's debt.  Real gross domestic fixed investment had been declining since 1982.  The structure of the South African debt was particularly disturbing.  Debt with a maturity of less than one year jumped from 56% in 1982 to 68% in 1985 to 82% in 1986.  South African banks were borrowing money internationally with short-term maturity and loaning it out as long-term loans in South Africa, on the assumption that the loans would be automatically rolled over as they matured.


Table 4

Foreign Debt of South Africa

End Year

Rand (million)

Dollar (million)






















Source: South African Reserve Bank


            In December 1984, Seafirst adopted a policy of no new loans to South Africa, followed by the Bank of Boston in March 1985 and First Bank System, also in 1985.  Even more significantly, in July 1985, North Carolina National Bank Corp., the regional bank with the largest lending to South Africa and the only regional bank to have an office in South Africa, ended all new loans.  It appears that many other banks, while not acting publicly, limited their loans in this period.

            The rapid rise in U.S. bank loans to South Africa came to an abrupt halt in mid-1985.  Between March and September 1985, U.S. bank loans to South Africa declined by $757 million.  In August 1985, Chase Manhattan quietly told its customers in South Africa it would not roll over loans.  Most U.S. banks which had not already ended new loans to South Africa quickly followed Chase's action.


Table 5

US bank loans to South Africa




End Year

$ millions

Percent of South



Africa's Total Debt






















Source: Federal Financial Institutions Examinations Council


            The U.S. banks' actions caused a panic in South Africa.  At the time, U.S. banks had outstanding loans of $3.5 billion, of which $2.8 billion had a maturity of one year or less.  Faced by the prospect of massive capital flight, the South African government stepped in, and in September 1985, it imposed a debt standstill and reimposed exchange controls.

            Two "Interim Arrangements" — the second one expires in June 1990 — were negotiated between the South African government and a "Technical Committee" of fifteen international banks, representing some 300 banks.  The U.S. representatives on the Technical Committee were Citicorp, Manufacturers Hanover, and J.P. Morgan.

            The exact terms of the two interim arrangements are not known.  According to press reports, the Second Arrangement lasted for about three years, during which only 13 percent of the capital was repaid.  Citicorp told The Africa Fund in early 1989 that it had received only about 5% of its principal back.5

            Despite the fact that anti-apartheid activists put pressure on banks to use the debt arrangements to put pressure on the South African government to push ahead with reforms, a Third Interim Arrangement was announced in October 1989 that effectively reschedules $8 billion of South Africa's foreign debt inside the standstill.  The new arrangement runs from 1 July 1990 to 1 January 1993.  During that period, South Africa will have to pay foreign banks approximately 20% — or $1.5 billion — of the debt inside the standstill.  By 1994, a fourth agreement will have to be reached for the repayment of the remaining $6.5 billion.

            South Africa's problem is that it owes about $12 billion outside the standstill, some $2 billion of which is due in 1990.  The debt repayment schedule under the Third Interim Arrangement is aimed at limiting the amount of debt inside the standstill that needs to be paid during this key period.  Chris Stals, chairman of the South African Reserve Bank, commented: "I am relieved we no longer face a crisis in June 1990, but this does not mean there is less pressure on the balance of payments.  We will meet our new commitments as we did the previous ones — with difficulty.  Economic policy will have to remain restrictive, especially considering the large payments of debt outside the net falling due next year."

            In order to get this new agreement, South Africa had to work hard.  F. W. de Klerk released eight long-term political prisoners, including Walter Sisulu, in October 1989.  The U.S. government advocated "giving F. W. a chance" and a grace period of at least six months.  But the Mass Democratic Movement in South Africa issued a strong call for financial sanctions and for no debt rescheduling and Walter Sisulu condemned the new agreement.

            It should be noted, however, that South Africa did not get everything its way.  Despite the fact that the dollar figure of the money covered by the standstill has dropped from $12 billion to $8 billion, it will be paying back slightly more than during the last agreement.  In fact, 20% of outstanding capital will be paid back during the coming 3 1/2 year period compared to 13% during the last three year period.  Combined with payment of debt outside the standstill, South Africa will be faced with considerable capital outflow.  Minister of Finance Barend de Plessis admitted, "All South Africans must realize that the country faces tough times in the next four years in which we have to pay back $8 billion in foreign debt."  He also said that South Africa would have to adopt strict internal policies to limit growth of the economy.


Exit Loans

            The new agreement also has a provision whereby banks can remove their debt from the standstill by converting their debt to long-term loans.  Under this provision, banks will get no principal payments for 7 1/2 years and then will be paid back in equal six monthly payments over the following 2 1/2 years.  A similar clause existing in the Second Interim Arrangement was exercised by Citicorp.  South Africa is encouraging banks to take this option as it eases the immediate payment problems.  Chris Stals remarked: "We already faced substantial liabilities up to 1997 and it was prudent to avoid more pressure during this period.  The repayment of these loans will be bunched in three years beginning in 1998."

            It is difficult to determine how many banks have exercised this clause, but U.S. bank loans with a maturity of over five years have increased from $36 million in March 1987 to $747 million in June 1989.  This implies that at least $710 million has been converted under the Second Interim Arrangement to long-term loans.

            Citicorp and Manufacturers Hanover are two prominent banks which have converted some of their outstanding loans.  In February 1989, Citicorp exercised one of the exit clauses by converting $660 million in short-term loans covered by the Second Interim Arrangement into a ten-year loan.  Citicorp will receive no repayment of principal until 1992, with full repayment payment by 1997.  Citicorp was criticized for this action because it removed immediate pressure on South Africa at a time when it was facing serious capital outflows.  To protest Citicorp's action, Westchester County, New York, withdrew $40 million from Citicorp.

            Maintaining pressure on banks that continue to collaborate with South Africa is also the objective of a bill which Congressman Walter Fauntroy (D-Washington, D.C.) introduced in the House of Representatives shortly before the announcement of the Third Interim Arrangement.  If enacted, the bill would impose a series of financial sanction against South Africa.  It would require U.S. banks to insist that "not less than 20 percent of the principal" on loans be paid back each year; prohibit converting loans to long-term exit loans under the exit clauses and holding of loans after 31 December 1992; and ban trade financing.

            It is clearly very important for South Africa to keep its connections to major banks of all its major trade partners.  South Africa continues to be able to get trade credits and have other links with international banks.  South Africa has been able to raise some $600 million in bank loans backed by gold reserves held by the South African Reserve Bank.  In early October 1988 the State President P. W. Botha used the opportunity presented by the funeral of West German leader Franz Josef Strauss to visit Europe and meet with Swiss bankers and businessmen.  In late October the Johannesburg city council announced that it expected to secure a $19 million loan.  Anti-apartheid activists are keenly aware that foreign banks will make loans to South Africa if they seem profitable and if they do not face anti-apartheid pressure.


Portfolio Investment


            U.S. investment in South African companies listed on the South African stock exchange is over $14 billion.  W. I. Car, the London stockbroker, estimates that about 25% of South African gold mining shares, worth about $2.5 billion, are owned by U.S. citizens.  Davis Borkkum Hare, a Johannesburg stockbroker, estimates U.S. ownership in all South African mining shares (not just gold) at 14%, worth R14.3 billion ($4.1 billion).

            This stock is owned in a number of different ways.  A number of gold and other mutual funds own stock in South African gold mines.  In this case, investors buy shares in the U.S. mutual fund, that then invests in South African gold shares.  Two such mutual funds are International Investors and the Franklin Gold Fund with some $300 million and $69 million respectively, invested in South African gold shares.  One company, ASA Ltd., owned some $998 million in South African stock, primarily gold mines, in August 1987.  Unlike a mutual fund, U.S. investors buy ASA on the U.S. stock market.  Stock in many South African companies South African companies is also available through American Depository Receipts (ADRs).  ADRs are receipts issued by a U.S. depository bank to promote trading in a foreign security.  The bank holds the foreign securities and the ADRs are issued against them.  Dealers in ADRs of South African companies include Citicorp, Chemical Bank, Irving Trust, Morgan Guarantee Trust and the Bank of New York.

            The Anti-Apartheid Act's prohibition on new investment in South Africa has been interpreted to mean that American residents cannot purchase South African stock issued after the effective date of the Act.  Stock issued prior to that date can be can be bought and sold.  The August 1988 bill passed by the U.S. House of Representatives would mandate the sale of all this stock.  The possibility of such sanctions has had a depressing effect on South African gold shares.  Notes W. I. Car, "the threat of further U.S. disinvestment has made South African gold shares unacceptable to the international investor."  If Americans were forced to sell this stock, it would have a significant downward pressure on gold stocks, and limit the ability of the gold mines to raise much needed capital.




            South Africa has a continuing need for foreign capital.  Without new foreign capital, in terms of loans and investment, South Africa's economy cannot grow at more than a marginal rate.  A few examples are worth citing.

            The gold mining industry has historically been developed with foreign capital.   With gold providing 40% of South African exports, it is vital to the economy.  Yet South Africa's gold production declined 40% between 1970 and 1987.  To even maintain current production levels, South African mining companies will have to invest large sums of money in exploration and new mines.  When South African companies need to raise money to finance new mines, they usually issue stock, much of which is purchased overseas.  Already U.S. citizens are prohibited from buying new stock and if such sanctions are extended, it would be difficult to see how South Africa could afford to undertake the necessary expenditure to develop new mines.

            Prior to the imposition of the debt standstill, South African state corporations, such as ARMSCOR (armaments), ESKOM (electricity), SASOL (oil), and ISCOR (steel) all borrowed extensively overseas.  Many South African companies also borrowed on the international market.  All have had to drastically revamp their capital expansion programs as a result of being cut off from the foreign capital market.  They now have to depend on the domestic capital market.

            Foreign technology is as important to South Africa as foreign capital.  The anti-apartheid movement has been less successful in blocking technology than it has been in forcing companies to withdraw.  But South African businessmen are increasingly concerned that they will be cut off from needed foreign technology. 

            The development of the Mossel Bay gas field demonstrates the link between foreign capital and technology.  At least 20% of Mossel Bay will be foreign sourced, without which the development could not b e undertaken.  Without the necessary trade finance, this key foreign input cannot be purchased.

            Unless South Africa abandons apartheid, the logic of the situation is that there will be more sanctions in the future, not less.  Although the Bush administration opposes addition sanctions, this does not mean that it will be in a position to stop such legislation.  While welcoming the fact that the Republican Party maintained control of the White House, South African Foreign Minister Pik Botha cautioned, "A Bush victory does not mean that South Africa has escaped sanctions."

            South Africa's new President, F. W. de Klerk, faces a serious contradiction in his effort to modernize apartheid.  If he eases up and allows more political activity, the world will once again see massive demonstrations against so-called change that does not lead to a unitary democratic state.  But if it does not ease up, no changes made will have the slightest credibility either at home or abroad.

            A combination of growing resistance and capital flight has severely challenged the long-term survival of the apartheid system.  The withdrawal of numerous U.S. and UK companies is a significant victory for the anti-apartheid movement.  Yet many companies continue to operate in South Africa, either through direct investment or thorough licensing, franchising, and distribution agreements.  Recent events have demonstrated how vulnerable the South African government is to international pressure.  Now is the time to increase that pressure until the end of apartheid and the installation of a unitary democratic state.


[Home to]


[1]  Disinvestment is defined as the selling of equity ownership in South Africa.  A company disinvests if it sells its ownership in a South African subsidiary (50% or more owned) or an affiliate (less than 50% owned).  An individual or company (such as a mutual fund) may also own share in a South African company, the selling of which is also considered disinvestment.  Divestment is the process where an individual or an institution sells its securities (stocks or bonds) in a company that does business in South Africa.  Non-equity ties are licensing, distribution, franchising or management agreements between U.S. companies and South African companies.  A distribution agreement can be indirect, such as a case where a U.S. company gives a European company world rights outside the U.S.

[2]  The primary reason for the increase between 1985 and 1987 was the reinvestment of profits by those companies which had not disinvested was greater than the capital outflow from South Africa as a result of disinvestment.  Another factor is the change in the rand/dollar exchange rate, which also changes the dollar value of U.S. investment.  The General Accounting Office (GAO) has computed the value of U.S. direct investment in South Africa, adjusted for exchange rate fluctuations, as having increased from $2.04 billion in 1984 to $2.23 billion in 1986 before declining to $2.12 in 1987.

3  Because the financial rand rate fluctuates considerably at a discount between 20% and 40% of the commercial rand rate, this also makes it difficult to convert the rand to dollars for companies disinvesting.  Moreover, the author does not know the date the money is actually removed from South Africa.

4   Lotus products, especially Lotus 123, are widely available.  It would be interesting for Lotus to try to sue users of its products in South Africa for violations of copyright.

5  Following the debt standstill, Citicorp had ended new cross border loans to South Africa and, in mid-1987, sold its South African subsidiary to First National Bank of South Africa.  First National, the largest bank in South Africa, is the former subsidiary of Barclays Bank.  Citicorp was the only U.S. bank to have an actual subsidiary in South Africa, although several others did have offices.