South Africa's balance of payments
A. B. DICKMAN
There can be little doubt that the balance of payments underwent a profound transfor- mation after 1964. The slowing down of the economy from 1960-1 to 1962-63 led to abnormal current account sur- pluses which helped to finance the defi- cits on capital account that persisted, de- spite the tightening of exchange control from mid-1961. But by 1965 the position re- versed itself. Capital began to flow in again and, by contrast, assisted in financing the current account deficits which began to arise from 1964 onwards as the new phase of business expansion gathered momentum.
However, from late 1967 the inflows to the private sector began to assume a some- what different character. Mounting cur- rency uncertainty after mid-1967, which was intensified after the sterling devalua- tion and the subsequent international gold crisis, the political disturbances in France during 1968 and the continuing difficulties of sterling, changed the emphasis of the capital inflow. Whereas in 1966 only 10 per cent of that portion of the private capital inflows classified as long-term' was attri- butable to stock exchange transactions, this percentage rose in 1967 to 19 per cent and in 1968 to 43 per cent.
The shifting composition of the long- term private inflow reflects the- finan- cial mood with which it was associated, both internationally and domestically, which led to the unprecedented up- surge in equity prices on the Johannesburg stock exchange and consequent lowering of earnings and dividend yields to approxi- mately New York and London levels. As world stock markets began to decline early in 1969, foreign buying of South African shares dwindled and presaged the sharp reaction in prices which occurred after May. Although complete figures for 1969 are not available, it can be anticipated with some confidence that the smaller net long- term capital inflow for that year included little, if any, funds by way of stock ex- change transactions.
It has already been intimated that by far the greater capital inflow occurred in 1968. In this year, no less than 8.446 million of foreign funds (including trade credit) en- tered the country. Of this net capital inflow, R.372 million was private and R.74 million official. Since official capital movements reflect domestic policy considerations as well as the outside availability and cost of funds, it is best, for this reason, to look at the private sector alone. Compared with 1968, 1967 was the next best year with a net inflow of 8.235 million whereas 1965 and 1966 yielded R.161 million each. This gives a total net inflow on private account for the four years of 8.929 million, including un- accounted private inflows shown as errors and omissions. This figure can be compared with the total outflow of R.427 million from 1960 to 1964.
We have. noted the role of share invest.; ment in the capital inflow, but the contri- bution of other investors has not been dis- cussed. Where indeed did the capital inflow come from? Unfortunately, there are no means of assessing the sources on a geo- graphical basis from official statistics. We can, however, illustrate the nature of the South African enterprises to which it was directed. Again, two broad periods are distinguished in a summary table of the average position for the private sector, but in this case excluding errors and omissions:
Net Changes in Foreign Liabilities (R. million) Average per annum 1960-64 1965-68 Long-term
Direct investment in Branches — 2.6 + 4.0 Subsidiaries — 0.6 +61.0 Other — 0.4 Non-direct investment — 8.8 +50.5 Stock exchange transactions —58.2 +41.0 Short-term
Direct investment — 1.2 +30.7 Non-direct investment + 1.8 + 17.7 Net change in foreign assets —19.2 ,-27.5 Total net private capital —89.2 +177.5 The figures speak quite eloquently for themselves. In the years prec/eding 1965 non-resident parent companies, in general, were relying on retained earnings to finance the expansion of their local branches or subsidiaries. From 1965 onwards they in- vested, via credit facilities or by direct transfer of funds, an average of R.65 mil- lion per annum in South Africa. Non-direct investment (i.e. investment where there is no effective control, as defined) and short- term investment displayed a similar pat- tern, but the swing from net disinvestment to net investment is evident most dramatic- ally in the case of stock exchange trans- actions. South Africa invested somewhat greater amounts abroad in these two per- iods, but the amounts were relatively small.
It is not surprising that inflows for share investment have been the most volatile element in the total of capital movements. What is interesting is the relative stability of the other items, although in 1968, in most cases, they were on a level that was gener- ally higher than in the preceding three years. While it must be assumed that the amounts of these items will have dropped soinewhat in 1969, transactions on stock exchange account and for short-term investment took the brunt of the decline— indeed, preliminary figures for the latter show a net outflow of R.29 million as against an inflow of 8.103 million on long- term account.
Since 1968 and 1969 were, clearly, years of some aberration in the pattern of inflow that has become established since 1965, the question is whether the trend of relatively substantial and regular inflows of private capital for direct and indirect investment. excluding stock exchange transactions, will continue. And if this were to be combined, on average, with a reasonable inflow for share purchases, this would make a great cpntribution to the balance of payments. There is some circular reasoning here, in as much as the capital inflow has been a response to the exceptional growth rate of the economy—around 6 per cent per annum in real terms—which has been recorded over the past few years. The inflow permits the growth in imports which is a reflection largely of investment needs and is itself a response to that growth. In my view, the outlook is encouraging if sound policies are pursued to permit the economy to remain along its new and exciting growth path. The potential that this will create will encourage foreign investors to continue sharing the faith of local entrepreneurs in the dynamic possibilities of an economy with a vital domestic market and stimulating prospects in world export markets for many basic commodities.