7 July 2000 - Will South Africa Make It

As a global investing rule, I’ve always said a good leader is one of a country’s most valuable assets. There may be a wealth of resources available but unless there’s someone shepherding a country, all that opportunity often goes to waste. (Read my last column in Worth on Angola for evidence). The leader of a country, after all, is like a company’s chief executive officer. That person calls the shots; he or she establishes the vision for the entire country. When a leader can successfully execute on a vision, prosperous times often follow. That’s good news not only for the people of the country but for investors who put their money in that leader’s hands.

I can’t say enough good things about the leadership in South Africa. It’s been about seven years since apartheid, the rigid segregation imposed by the White government, was dismantled. I grew up in Alabama at a time when a white-dominated, segregated society was moving towards an integration of white and black communities. It wasn’t always a smooth transition. Suspicion and fear permeated the society and it took years – even generations – before people really learned to live comfortably together. As I spent a month driving through South Africa’s many cities and villages, I was amazed to discover little to no racial tension. I found virtually no trace of underlying hostility towards the white community.

This is clearly the work of Nelson Mandela, South Africa’s former president. Mandela exudes a magical power in South Africa. When he speaks of South Africa as “rainbow country” filled with people of many different cultures and ethnicity, it’s clear he is not just spouting political rhetoric. So many of the leaders who took over African nations ultimately used their power and position for profit and gain. Mandela is a man who truly believes in the future of his country.

Mandela stepped down as president in 1999 and was succeeded by Thabo Mbeki, the former vice president. Mbeki, 57, has a background in economics and is described by many as the architect of South Africa’s economic policies. He is a quieter, more bookish man than the outspoken Mandela. And he has a tough act to follow. So far, though, I have been impressed with him and believe he only echoes Mandela’s positive wishes for South Africa.

South Africa, after all, has a lot to offer. With a population of over 40 million, South is the most highly industrialized of African countries. It’s economy accounts for 40 percent of all of sub-Saharan Africa’s total gross domestic product. It’s stock market, the Johannesburg Stock Exchange, ranks among the largest in the world. In fact, the trading volume on the JSX has increased from 5.2 billion shares at the end of 1995 to 43.1 billion at the end of 1999.

South Africa’s most valuable assets are its wealth of natural mining resources. It’s is the world’s largest producers of gold, platinum and chromium. It’s a major exporter of agricultural products such as corn and wheat and sugarcane.

In sharp contrast to other countries which have experienced dramatic change, both Mandela and Mbeki have tried to instill fiscal responsibility into the country’s economic policies. In 1996, the government released its macroeconomic strategy, “Growth, Employment and Redistribution,” a policy geared towards privatization of state-run agencies, reduction of tariffs and subsidies for new and foreign investors. Mandela and Mbeki are slowly weeding out much of the bureaucracy and red tape that had deterred foreign businesses from setting up shop and have courted foreign businesses to come open up shop in South Africa. The central bank has lowered the prime rate more than 10 points over the past few years. That has spurred development. Cranes and construction sites dot the landscape. As I drove through cities like Cape Town and Johannesburg, I saw fashionable new shops and stores that were not there during my last visit.

While the economy still has a way to go, the efforts appear to be paying off: After barely budging through 1998, South Africa’s GDP is expected to grow 3.5 percent in 2001. The budget deficit, which sits around three percent of GDP, is half what it was in the early nineties as a result of the leaders’ fiscal policies.

Given my faith in the leadership and all the positives Mandela and Mbeki have done, one might think I believe South Africa was a great investment opportunity, right? Not quite. While I have complete faith in the top leadership of the country, its clear South Africa has a ways to go.

Crime is rampant. In fact, crime has gotten so bad in Johannesburg that even the stock market is moving its offices to the upscale suburb of Sandton. South Africa’s minister of safety and security recently ordered a moratorium on the release of crime statistics. While the government says the reason is because they are revamping their collection and analysis methods, my guess is they have something to hide as well.

There are many other problems. Unemployment is over 30 percent. AIDS isn’t just a problem, it’s an outright epidemic: As many as 10 million South Africans are likely to die from the disease in the next 10 to 15 years. That’s nearly 25 percent of the current population.

The government has its problems, too. While Mandela and Mbeki are good, honest men, there is serious corruption at the middle and local levels of government. We heard many reports about how nurses working in hospitals and clinics around the country were unqualified to work in the health care industry. They had simply bought their credentials from local officials. The same was true with teachers and pilots, who were able to fake their way through exams or buy licenses on the black market.

The education system needs lots of work, too. On my last trip, I visited Alexandra, one of the segregated townships set up during apartheid. At the time, the schools were in dreadful condition: windows were broken; classrooms had no desks; there were no books on the shelves of the library.

Nearly a decade later, nothing has changed. The teachers at the schools are unhappy because the principals, once fellow teachers, are now political appointees more interested in climbing the ranks of office than in bettering the school system. A recent study of 20 countries in Africa found South Africa’s fourth graders ranked at the bottom.

Those South Africans, both white and black, who do manage to get an education, often leave the country for better opportunities. As I have discovered in many other countries around the world, the best and brightest often vote with their feet and leave their homelands if they know they can do better elsewhere.

Although infrastructure development is part of South Africa’s new economic policy, I still saw plenty of problems there as well. Not surprisingly, I pay particular attention to a country’s roads and South Africa’s pubic works are in poor condition. Many of the colonialists who were in power in Africa spent a great deal of money on roads and highways. When the countries gained their independence, the corrupt leaders of the African countries let the roads deteriorate. Zambia and the Congo used to have solid infrastructures; now they are starting to disappear. The same thing appears to be happening in South Africa. The government director of transport even confessed that the government was spending only half what was needed to properly keep up infrastructure.

And while the government is encouraging foreign countries to invest and open businesses in South Africa, many are hamstrung by a host of new laws designed to protect the workers. For instance, the South African government has instituted a policy of affirmative action similar to the one in place in the U.S. I spoke to foreign CEOs who said the affirmative action law made it virtually impossible for them to fire anyone if they weren’t working hard enough or even didn’t show up to work. The only recourse the managers had was to reward those who work hard with bonuses and raises, while ignoring the laggards. For businessmen considering opening up shop in South Africa, the choice is now whether to set up an operation in South Africa where such laws exist or go start a plant in a place like Brazil or Taiwan where the laws are much more liberal. I met the head of a large Asian manufacturer who opted to open a plant in the tiny neighboring country of Swaziland precisely because such affirmative action laws had crippled his other local businesses.

A major concern right now is the state of the currency. Despite all the proper fiscal policies, the currency in South Africa, the rand, is down 12 percent since the beginning of this year. Some point the finger at the strong dollar. Others say it is the result of Zimbabwe, South Africa’s neighbor, which is the midst of an economic and political crisis. Roughly half of South Africa’s economy depends on trade, much of it with its neighbors. Currency markets are like a thermometer; they tell me whether a country has a fever although they do not reveal the cause of the fever.

I was surprised to discover South Africa’s army is one of the largest in Africa, second only to Egypt’s military force. Why do they need such a huge army? There’s no visible threat. I think the money spent supporting the army would be put to better use in the education system and/or infrastructure.

Despite my faith in the leadership in South Africa, I ultimately couldn’t find anything compelling for investment. The one business that seems to be thriving is the security industry. I saw armored cars, secure parking areas and hired guards everywhere. Unfortunately, I did not find a way to invest in that business. A smart entrepreneur might do well in the tourist industry, as there are beautiful beaches and South Africa’s own version of wine country in the Stelenbash region. Game parks and casinos are opening all the time.

This is a clearly a testing period for South Africa. It’s a test to see whether the best intentions of its wise leaders like Mandela and Mbeki will trickle down to the entire country. South Africa could have gone the way of so many other newly independent nations. The leaders could have spent the country into bankruptcy; they could have plundered for their own personal gain. But these wise and thoughtful leaders have clearly taken steps in the right direction. For now, there’s still a long road ahead.