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.
Analysts talked as if the boom would never end and share prices would climb forever. BEE was supposed to be the growth engine of the economy, as a black middle class acquired luxury cars, townhouses, flat-screen TVs and state-of-the-art security systems.
Now experts warn that the length and depth of the global downturn will determine how many BEE deals unravel in coming years. Some of the deals are financed by companies bringing in black partners and are seen as likely to come under less pressure as long as the companies remain sound.
But some analysts question how effective the government's BEE policy can be if intermittent global shocks are able to undermine it.
BEE analyst Duma Gqubule said that without high growth and low interest rates, BEE would never work.
"How do you make water run uphill? It's almost impossible," he said in a phone interview. "At the end of the day, we need huge growth rates for these [deals] to be feasible. Short of achieving Asian growth rates and having low interest rates and changing our economic policies in a significant way, it will never happen."
The beneficiaries of South Africa's recent boom were mainly white, especially in the real estate market, he said. Most blacks made no money from rising property values, he said, because they had no property to begin with.
Reg Rumney, analyst and director at the Center for Economics Journalism, said that BEE deals are inherently noncommercial.
"For it to be black empowerment, the black partners by definition must have no money. So there's always got to be some financial engineering."
But he said it was too early to predict the impact of the global crisis on BEE.
"We don't know how long the bear market will last. In the case of a long downturn, some of these deals will unravel. It will leave a very bitter taste in the mouths of the black empowerment partners. They would be left with nothing."
In a downturn, share prices fall, affecting dividends and the income of BEE companies.
The meltdown underscores how little leeway there is for emerging leader Jacob Zuma to deliver on the more aggressive poverty-reduction strategies demanded by his allies in labor unions and the Communist Party. They have called for budget deficit financing to improve education, health and housing.
But the bulk of future borrowings may be needed for infrastructure projects that underpin the economy, including the nation's power grid.
After widespread blackouts this year hit South Africa's economy hard, particularly its crucial mining sector, the state-owned electricity company, Eskom, developed an ambitious -- and expensive -- program to upgrade facilities.
The global crisis affects the cost of financing the infrastructure program, Rumney said. "We do have a budget surplus, but that could disappear very quickly."
Finance Minister Trevor Manuel said in an interview with Business Day newspaper this week that the crisis could also affect construction plans for soccer's 2010 World Cup, to be held in South Africa.
"The bottom line is that in the next while, and it's not going to be six months or a year but probably two years, there will probably be enormous recalibration of what we do and how we finance it," Manuel said.