– TransNatal’s acquisition of Rand Coal to form Ingwe Coal in 1994 – is a “genuine” South African merger (p.17).’ He makes the important point that it is remarkable that South African conglomerates have not made any large acquisitions in their own country, pointing out that this lack of acquisition is true even in sectors such as utilities and internet related investments ‘... where family-controlled business groups in OECD countries have been active even while refocusing their portfolios on the core business’ (ibid).
The South African context for mergers and acquisitions was one where the MEC continued to stifle investments into diversifying the industrial base of the South African economy. Instead, the concern of big businesses that dominated the MEC was to restructure in order to appear more attractive to investors speculating in the markets where they had relisted.
FINANCIALISATION OF THE SOUTH AFRICAN ECONOMY
The South African financial system had developed along similar lines to that of the English and US systems and can be described as market-based rather than bank-based (Roux 1991). In other words, South African businesses that require finance for long-term investment use retained earnings or seek finance in securities markets. The state-owned Industrial Development Corporation does provide some industrial finance but on the whole its lending is a very small share of total lending in the country and its main customers have been large, capital intensive projects in the mining and minerals sectors (Roberts 2008). The banks and other monetary institutions largely provided business with short-term operating capital and serviced the credit card, home mortgage, vehicle lease and finance and other short-term lending for consumption.
Figure 4 shows that during the period 1990 to 2008 this form of credit allocation continued in the economy. One can see the growth in mortgage advances from 2003 to 2008 which supported the growth of a housing price bubble in the relatively more affluent real estate market in South Africa. House price increases in South Africa were higher than in the US during the period 2003 to 2007, when US subprime lending was rampant. For the period 1990 to 2008, investment was a relatively very small share of total private sector credit extension.
An important phenomenon in the global economy and South Africa is that the size and influence of the financial sector grew from the 1980s, when financial markets and cross-border capital flows were liberalised. The market-based banking system and banking deregulation by the apartheid state during the 1980s supported the growth of the South African financial sector. Further, the political changes, the decline in MEC investments and trade liberalisation led to greater private sector interest in financial assets from the mid-1990s. Figure 5 shows that value added by the finance and insurance services sector increased rapidly during the 1980s when economic growth and investment as a percentage of GDP declined significantly. The contribution of the finance and insurance sectors to GDP grew even more rapidly from 1994 to 2007, while overall investment levels remained relatively low. An improvement in investment levels from 2003 included the impact of government’s infrastructure investments from 2006, increased services sector investment linked to financial sector growth, increased household consumption and more household construction and purchase of automobiles. In short, the growth of the financial sector and its increased share of GDP were not associated with higher levels of investment.
Figure 5: Private sector credit extension by all monetary institutions by type (percentages of total)
Source: calculated using SARB data
An important aspect of the financialisation of the South African economy during the postapartheid period was increased capital inflows, particularly short-term portfolio flows from developed countries. These short-term flows signalled not only the end of apartheid financial isolation but, more importantly, a change in sentiment about South Africa by global financiers, after they had ignored South Africa subsequent to its 1985 debt crisis. The slow liberalisation of exchange controls by the South African government from 1996 may also have affected this sentiment but the more important reason for the increased flows to South Africa was the huge increase in global liquidity that was accompanied by large movements of short-term portfolio flows into certain developing countries in Asia, Latin America and South Africa in Africa.
I argued in 2006 that the surge in net short-term capital flows to South Africa increased macroeconomic instability with more volatility in exchange rates, interest rates and inflation associated with changes in capital inflows (see Mohamed 2006). A stark illustration of this volatility and instability was the sharp drop in the rand to dollar exchange rate of 35 per cent in 2001, which could be defined as a currency crisis. This was caused by a rapid decline in net portfolio flows in 2000 which turned sharply negative in 2001 (see figure 6). During this period, inflation increased sharply as a result of the weaker rand. The South African Reserve Bank, which follows an inflation targeting policy, increased interest rates by 4 per cent. Net portfolio capital flows began recovering in 2002 and turned positive in 2003. They grew over the next few years to peak at nearly 8 per cent of GDP. This recovery in portfolio flows was accompanied by rapid reductions in interest rates that contributed to the house price and financial asset bubble from 2003 to 2007.
Figure 6: Gross fixed capital formation and finance and insurance sector value added as percentages of GDP
Source: Quantec
In an examination of the period up to 2002, I argue that the surge in portfolio capital flows to South Africa and the related increased extension of credit to the private sector during the 1990s was not associated with increased levels of fixed investment but with increased household consumption, financial speculation and capital flight.
Figure 6 compares the trends of total fixed capital formation, private business fixed capital formation, total domestic credit extension and total credit extended to the private sector all as percentages of GDP for South Africa for the period 1990 to 2007. Figure 7 shows that credit extension to the private sector increased about 22 per cent from 2000 to 2008 but that private business investment increased by only 5 per cent during that period. What can also be inferred from Figure 7 is that a part of the increase in capital formation from 2006 may not be due to private business capital formation but to state investment in infrastructure. The increase in private capital formation from 2003 to 2008 is due to investments spurred on by increased financial speculation and debt-driven consumption, not long-term investment in productive investment. Long-term productive investments are required to redress the structural industrial weaknesses of the South African economy. I explain the process, which I describe as misallocation of finance, below.
Figure 7: Net capital flows to South Africa as percentages of GDP
Source: SARB
Figure 8 draws on data from the SARB’s flow of funds data to provide a trend of capital formation after depreciation by sector. We see that the foreign sector has very low levels of net fixed investment. Net investment
