Global turmoil threatens South Africa effort to create a black middle class
The government's BEE program seeks to give blacks with few assets ownership in companies. But many of the deals rely on share value.
JOHANNESBURG, SOUTH AFRICA — South African government efforts to transfer the country's wealth to black hands through its Black Economic Empowerment policy are being threatened by the global financial crisis.
Since apartheid, South Africa has managed to create a small super-rich class of politically connected capitalists, many of them members of the ruling African National Congress.
But the dream of the country, which fashions itself the "Rainbow Nation," to create a thriving, propertied black middle class has remained elusive, and South Africa continues to be one of the world's most unequal societies.
In the current worldwide crisis, small, open, commodities-based economies like South Africa's are particularly vulnerable. The nation's rand currency has fallen sharply in value, investors are fleeing the continent, and many BEE deals could be in trouble, analysts say.
The deals have various complex structures but they share a goal: to transfer substantial shares of companies into the hands of nonwhite partners who have few or no assets.
The BEE policy is the government's centerpiece for addressing the lingering effects of apartheid. It sets targets for companies regarding black ownership, management, training and other issues. Companies that fall short are to miss out on government business and be shunned by other firms that rely on government contracts.
In many BEE deals, shares acquired by black partners are the collateral for the loans supporting the deals; when share prices decline dramatically or dividends fall short of financing costs, the deals may run into trouble.
South Africa's stock index this week posted its worst week since 2001, and the rand was at its lowest level of the last five years. The FTSE/JSE Africa All Share index dropped 10.4%, its steepest five-day loss since 1998.
It's no coincidence that the last time a raft of BEE deals went under was in 1998, on the back of the 1997 Asian financial crisis.
Then, many black partners in BEE deals walked away with little or no equity in companies, their shares devoured by debt.
For five years, the program languished. But in 2003, when share prices climbed and confidence returned, so did BEE. With China hungry for African resources, pessimism in South Africa was practically unpatriotic.
