South Africa announced tonight a freeze on repaying the principal on its foreign debt until the end of the year but said it would continue to pay the interest through a special account to be administered by the country's central bank.
Finance Minister Barend du Plessis also announced strict exchange controls to stop foreign investment capital from leaving the country, as continued racial unrest and the Pretoria government's failure to make significant reforms have caused a massive loss of investor confidence in the country.
Imposing a repayment moratorium represents a serious setback to South Africa's reputation for honoring its debts, economists said here tonight. [In the United States, the decision was seen as a blow to South Africa's efforts to seek relief from its creditors.]
The controls, which include the introduction of a two-tier system for the country's currency, the rand, also will counter the divestiture campaign by partially barring the withdrawal of the funds of companies that sell their assets here.
Their money will be categorized as special "financial rands," and the companies will be able to get it out of the country only if other foreigners buy the specially discounted currency to reinvest in South Africa.
The announcement indicates that the South African Reserve Bank's governor, Gerhard de Kock, failed in his bid during the past four days to persuade U.S. and European banks to reschedule South Africa's short-term loan commitments.
The banks had refused to roll over the loans and demanded prompt repayment because of South Africa's worsening political crisis and because of political pressure on them to stop loans to the white-minority government, which applies a segregationist policy called apartheid.
This has caused what economists describe as the foreign exchange equivalent of a classic run on the bank, leaving South Africa unable to meet its loan commitments all at once.
The run sent the rand plummeting 35 percent in 13 days, to an all-time low of 36 cents in U.S. currency. Four years ago it was worth $1.34.
The country's total net foreign debts are $16.5 billion, of which 67 percent, or approximately $12.7 billion, are due within the next year.
Coming on top of escalating political unrest, a growing image of instability and the campaign for economic sanctions against South Africa, tonight's announcement will make attracting future loans -- which the country badly needs -- more difficult.
Reflecting widespread concern here over the debt repayment freeze, Harry Schwarz, a banker who is also chief financial spokesman for the opposition Progressive Federal Party, called it a "tragic event" that had "wrecked the country's unblemished credit record."
"This statutory moratorium on repayment will never be forgotten in world financial circles," Schwarz said. "To establish confidence and get new loans to help economic growth and fight unemployment will be extremely difficult."
Schwarz added that "this black day in South Africa's financial history" had been caused by economic mismanagement and a failure to realize the relationship between politics and economics.
Du Plessis admitted tonight that the economic crisis had arisen because of a view that "South Africa has changed as an economic risk consequential to the political events currently prevailing."
But he refused to make a statement pledging political reform, saying outsiders would have to "exercise a bit of patience" while the government continues to seek a political solution through negotiations with "interested parties."
Du Plessis referred to what he called a "significant" statement made earlier in the day by Foreign Minister Roelof F. (Pik) Botha, who said after talks with a ministerial commission of the European Community that the South African government was committed to a policy of granting political participation to "all communities at all levels in matters of common concern."
Although Botha's statement was phrased in conciliatory language designed to reassure the commission of foreign ministers from Italy, Luxembourg and the Netherlands, who will report to the European Community on whether it should apply sanctions against South Africa, it contained no new specific pledges of reform.
The chairman of the mission, Jacques Poos of Luxembourg, said before leaving the Johannesburg airport tonight that the European Community would not impose sanctions immediately but would be under considerable pressure to do so if the situation in South Africa did not improve "within a reasonable time."
Announcing the debt repayments freeze tonight, du Plessis said South Africa would appoint a "respected international specialist banker" to negotiate a "satisfactory system" for phased repayment after the four-month moratorium.
The temporary postponement of repayments also would apply to the liabilities of foreign branches and subsidiaries of South African banks, du Plessis said.
The minister stressed that the freeze would not stop payments for imports or normal interest payments on the loans and dividends payable on foreign investments in South Africa.
He said the restrictions would have to be extended to stock exchange transactions to prevent them from being a conduit for evading the control measures.
This would have the effect of deterring withdrawal of funds, although du Plessis stressed that the government had not introduced the control specifically for this purpose.
The two-tier system for the rand currency introduced by the complex exchange-control system will divide the currency between internal or "commercial" rands and external or "financial" rands. The financial rands usually will trade at a rate lower than the commercial rands on foreign exchange markets.
Chris Stals, the director general of finance, explained tonight that under the new system, which is actually the reintroduction of a similar system that was abolished last year in an attempt at liberal economic reforms, a foreign company that sold its assets in South Africa would not be able to transfer the proceeds of the sale in foreign currency.
The money would be, in effect, blocked from leaving South Africa because it would be in the form of financial rands, which could be withdrawn in foreign currency only if sold to another foreigner wanting to invest in South Africa. Financial rands cannot be sold to a South African individual or company.
Such a sale would probably result in a heavy loss, because the financial rands normally will trade at a lower rate than the commercial rands that the company received. Under the two-tier system that operated between 1979 and 1984, financial rands traded as much as 40 percent below commercial rands.
The lower rate becomes an inducement for a new foreign investor to enter the South African market.
If the financial rand is trading at 40 percent below the commercial rand rate, it means, in effect, that a new investor can buy into the South African market at a 40 percent discount, while the former investor departs with a 40 percent loss.
The system will therefore operate as a two-way protection against the loss of foreign investment capital in the face of the growing divestiture campaign in the United States and other western countries.
Despite this, du Plessis insisted that his government had introduced the two-tier system only to meet the crisis caused by what he called the "bunching" of foreign debt repayment demands.
Once this problem had been overcome, he said, South Africa would want to relax the controls and revert to the more open financial policy it had begun introducing last year.
But du Plessis refused to estimate how long it might be before the controls were removed, saying "no one can take an intelligent guess at that, although it remains our intention to make its life as brief as possible."
Economists here were predicting that the stringent controls would mean a sharp recovery in the dollar equivalency rate of the commercial rand when the Johannesburg foreign exchange and stock markets reopen Monday following a six-day closure.
Economists estimated that the value would be around 55 U.S. cents, or 28 percent higher than the rate at which the rand was last traded.
That could mean a substantial opening gap between the two rands. As one economist said: "In future, the gap between the two rand rates will be the index of foreign confidence in South Africa."