Meeting Nelson Mandela and Rating South Africa

David Levey was Managing Director of Moody’s sovereign rating group in 1994 when South Africa applied for a credit rating. The country had recently ended its racially discriminatory system of apartheid and elected Nelson Mandela its president. David describes key players in South African politics at the time, the new government’s policies, and Moody’s process in rating the country’s debt.

Lengthy negotiations led up to the release of Nelson Mandela from prison in 1990 and still more negotiations followed to end apartheid in South Africa and hold elections. Finally, on 10 May 1994, Mandela was elected president of South Africa.

While South Africa was under the apartheid regime, various sanctions excluded it from international capital markets, and it was not able to issue cross-border debt. The new government wanted to enter these markets and issue US dollar-denominated bonds. To do that, the government felt it needed to have credit ratings from the two big rating agencies. In late summer 1994, South Africa’s finance ministry approached Moody’s Investors Service and Standard and Poor’s about obtaining credit ratings.

In 1994, I had headed Moody’s sovereign rating group for eight years. We were responsible for establishing and monitoring ratings assigned to government debt. The 1990s was an interesting period. Lots of countries came to the international debt market for the first time, including India, China, Israel, Italy, Greece, Russia, and many Central and East European countries. They all asked for credit ratings from Moody’s, so it was quite an exciting period of expansion for my group.

Kristin Lindow and I visited South Africa late in the summer of 1994. Kristin was the lead analyst on the rating, responsible for monitoring the country and making rating recommendations. Tom McGuire; head of all corporate, financial institution, and structured finance ratings groups at Moody’s; joined us on the trip to South Africa.

Our purpose in going to South Africa was to meet leading political, financial, and economic officials. We also wanted to talk to private individuals who were knowledgeable about the country. When we established a new rating, we always held several days of meetings in the country and met with anyone we thought could tell us something important pertaining to the country’s credit risk. We needed, as we always did in these cases, to understand South Africa’s economic prospects, as well as the political forces at work that might affect economic policies and decisions. As always, our purpose was to assign a rating which would reflect the risk of default and the potential for loss, that is, the risk that South Africa might not pay interest and principal due on its bonds on time and in full.

When the end of apartheid and the terms of new elections were being negotiated, it was generally presumed that Nelson Mandela and his African National Congress (ANC) party would win any fair and free election held. But it was agreed that the government Mandela would head would be a government of national unity and include all important political parties. So, the government formed was very diverse, made up of lots of different kinds of people with different ideologies.

Chief among the other parties sharing power with the ANC were the National Party and the Inkatha Freedom Party. The National Party had been the dominant White Afrikaans party in the previous decades of apartheid while the Inkatha Freedom Party espoused a Pan Africanist ideology with roots in the Zulu tribal confederation. In the new government, former South African president Frederik de Klerk of the National Party became deputy president and Mangosuthu Buthelezi of the Inkatha Freedom Party became Home Affairs Minister. So clearly, we needed to have meetings with these three top political leaders: Mandela, de Klerk, and Buthelezi.

Mandela had already made some interesting decisions that indicated the nature of his government’s policy priorities. He had appointed Chris Liebenberg Minister of Finance. Liebenberg was a White South African of Jewish descent who had been the CEO of Nedbank, one of the largest South African banks. He was very liberal, had been a strong supporter of the ANC and Mandela, and was a key figure in bridging the gap between the ANC and the business community.

Mandela also retained Chris Stals as Governor of the Reserve Bank, a position he had held since 1989. One might very well have expected that Stals would have been replaced as head of the central bank. But Mandela kept him in his position and he stayed in that position until 1999, all through Mandela’s presidency. These two personnel decisions were signals, strong signals, of the direction Mandela wanted to go.

Such signaling was important because the ANC was historically a radical left organization. It had a close connection to the Communist Party, it had engaged in violent insurrection for many years, and it had a large and powerful trade union branch containing many militant workers, especially in the mining sector. There was a strong belief in many circles around the world that the new South African government would take a socialist direction, nationalizing industries, regulating foreign trade, and so on. So, this was one possibility. As part of our analysis, we needed to understand whether that was likely to happen. A big part of our evaluation would be parsing the direction South Africa’s economic policies were likely to go. Appointing Liebenberg and retaining Stals were initial signals that South Africa would not take a radical direction.

On the other hand, Mandela made appointments that recognized the political importance of radical elements in the South Africa polity. Joe Slovo served as Minister of Housing and Alec Erwin as Deputy Minister of Trade and Industry. Slovo had been a close friend and strong supporter of Mandela’s for many years. He was head of the South African Communist Party, while Erwin was a prominent party member. These appointments provided an entry point for the Communist Party and more radical ANC elements, giving them a stake in the new government.

We met Mandela at the presidential residence in Pretoria for lunch, followed by a lengthy discussion. We asked him frankly what he foresaw as the political and economic direction of South Africa. He gave us assurances that South Africa wanted to reintegrate into the global economy and be treated like a normal nation. They were not going to undertake nationalizations or other radical moves that would alienate the global financial markets. They were interested in getting the best rating they could and understood what they needed to do, Mandela said, in order to achieve that goal.

One of the most important topics we discussed was government finance. Mandela stated, and this was strongly reiterated by Finance Ministry officials, that the government was going to aim for a balanced budget, that it didn’t want to fall into the kind of debt spiral that characterized so many developing countries, despite the huge spending pressure created by poverty and unemployment.

Mandela felt that this was the best path forward to solve South Africa’s problems. The country had massive unemployment and great poverty within the majority Black population. There was huge income inequality, with the incomes of Whites and so-called Coloreds (mixed race) being much higher than that of Blacks. The government wanted to deal with unemployment and decrease the level of income inequality. It felt that integrating into the global network of trade and capital markets and increasing exports would be the best way to improve the people’s economic welfare.

That was the nature of our discussions with Mandela, which were focused at a very high level of generality, rather than on specific policy details. It was very important for us to hear directly from him on the ideological and political direction the new government would take.

Mandela was a very charismatic person. It was something we discussed when we were in South Africa and later in our rating committee meeting back in New York. We all felt that Mandela was absolutely crucial to the process, that without him it would have been much harder to anticipate South Africa’s future direction. He was a unifying figure and people were willing to trust him -- people both to his political left and right. ANC party members who were not happy with his policies were nevertheless willing to go along with those policies because of his enormous prestige. People from the old regime trusted that he would not be leading a government of revenge and settling scores. He was key to the process of building a new South Africa.

Another interesting meeting was with the previous president, Frederik de Klerk. As you can well imagine, his role was pivotal – he played a major role in allowing the transition to go forward peacefully. There were elements in the White community that were fascistic and wanted to resist the transition violently. So, it was extremely important that de Klerk and other leaders of that community said, “Look, this is something we have to do. The country can’t go on the way it has gone on, and the transition has to be made, and it should be made peacefully.” The meeting with de Klerk assured us that the top leaders of the Afrikaans speaking community were going to support the transition and that the country wouldn’t sink into civil war, which was a concern that a lot of people had at the time.

The meeting with Mangosuthu Buthelezi was important because Buthelezi had been Mandela’s rival over the years for leadership of the Black community. He was a fascinating figure. He was the traditional leader of the Zulu community, which was the largest ethnic group in South Africa. Mandela was not a Zulu – he came from the Xhosa tribe – and the new government needed support among the Zulu people.

Buthelezi was, at the same time, a traditional tribal chief, the leader of a modern political party, and a bureaucrat running the Ministry of Home Affairs. He had spent time in the U.S. and was a historical bridge between an older traditional social structure and a newer way of life. Buthelezi’s support for the new government was very important and he took a lesser position in the government than might have been expected. When we met with Buthelezi, we discussed his goals, how his people felt about the new government, why he was supporting it, and what he wanted to get from it. It was also very important for us to understand whether there would be a political split in the Black South African community and whether all parties would work together for common goals. Buthelezi gave us his assurance that cooperation would prevail.

These were the most important meetings. The meetings with others were more technical and involved people in various ministries and private organizations. We talked to officials in the Finance Ministry and the Reserve Bank of South Africa about monetary policy, currency management, and budgetary policy. This got down to the details of why they wanted to issue bonds, where they thought they would issue, and what size issue they thought they could manage. Our chief contact for arranging these meetings and for providing an overview of the government’s economic policies was Minister of Trade and Industry Trevor Manuel, who moved up to Finance Minister in 1996.

The meetings were very productive and we learned a great deal. We went back to New York and went through our usual rating process involving lengthy internal discussions. There was correspondence back and forth with the South Africans consisting of additional questions on our side and answers from their side.

South Africa was an unusual country in many respects. One way it was unusual is that while it had very low average income and massive inequality it had advanced-world infrastructure. This is not something you see in most developing countries. It had state-of-the-art transportation, communication, and financial institutions. There was a dual system there. It was like two different systems operating side by side, that’s what apartheid really meant. The White economy was highly advanced. At the same time, the vast majority of the population lived in very poor conditions. It was a very unusual case, and we hadn’t seen anything comparable elsewhere.

The rating committee was made up of all the people at Moody’s who had knowledge about South Africa. Kristin presented her recommendation and we concluded to a Baa3 rating for South Africa. The significance of that rating is that it is the lowest so-called investment-grade rating on Moody’s scale. Still, being investment grade, it sent the message that we felt that South Africa was relatively safe for investors. We thought the risk of default was relatively low compared to other developing countries that had a below-investment-grade rating, what’s often called a speculative-grade rating. Our rating surprised a lot of people in the capital markets who weren’t expecting a rating so high.

S&P, in contrast, rated South Africa at the top of their speculative-grade rating scale. But Baa3 was our conclusion, and that rating held up for a very long time, in fact, the rating went up a number of steps in subsequent years. Quite recently, unfortunately, South Africa has fallen into major difficulties and the rating has been lowered by all the rating agencies to below investment grade. But this is a long time after the initial rating, 27 years ago. And back then, South Africa was able to issue bonds and the bonds did quite well in the market. The issue was lead-managed by Goldman Sachs and marketed by a large syndicate of global investment banks. So South Africa established its position in international capital markets.

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I met Mandela a second time in 1998, when his presidency was coming to an end. He made a trip to New York to give a farewell address to the United Nations, which was widely broadcast. An interesting fact about Mandela’s trip to New York is that he was invited by David Rockefeller to stay at the Rockefeller estate near Tarrytown, New York.

David Rockefeller was chairman of what was then Chase Manhattan Bank, and the bank had played a very large role in forging ties between South African companies and western financial markets. It had been a major player in helping South African banks and companies get into the global markets and reestablish connections with European and American institutions. Mandela and Rockefeller had become good friends.

Mandela contacted Kristin Lindow, still lead analyst for South Africa, which she continued to be for 18 more years; and invited us to have breakfast with him at the Rockefeller estate. Joining us also was Jonathan Schiffer, another analyst in Moody’s sovereign group. Mandela gave us his thoughts as he was leaving the presidency on what he felt he had accomplished. Thabo Mbeki was taking over as president and Mandela also gave us his thoughts on what the future was going to look like.

I remember the waiters brought a typical American bacon and eggs breakfast for the three of us from Moody’s and for Mandela they brought a traditional South African breakfast, some porridge and I forget what else. Mandela looked at our breakfast and said to the waiters, “You know what, I’ll have what they’re having.” Our breakfast looked a lot more attractive to him.

Mandela was a man of enormous humor. If you read his biography or anything about him, you see he was a man who never took himself too seriously, always had humor, always saw himself in the perspective of history, and was in no way arrogant. He was a man of enormous empathy. He could understand his enemies, where they were coming from, and he could deal with them for that reason without rancor and without a desire for revenge, despite the way he had been treated. I think this was part of his great success. Those personal characteristics were very important.

One of the famous stories about Mandela is that he invited some of his prison guards to his inauguration. When asked why, he said that if it hadn’t been for those men, he would never have survived his 28 years in prison. The guards, for whatever reasons – maybe they figured one day he would be in charge, maybe they just were sympathetic – did their best to keep him alive in very difficult circumstances. So, he invited them to his inauguration.

You may have seen that movie about Mandela and the all-White rugby team, which Mandela sort of adopted after he became president, somewhat to the dismay of a lot of Blacks. But he saw this team as a source of national unity, and that was very typical of the way he viewed things.

When he was President, Mandela established what was called a Truth and Reconciliation Commission. People could come and testify about how they had been treated and make accusations and then people that were accused would be called forward to answer. But the goal was always reconciliation, not punishment. The goal was to bring the country together. There were criticisms of its procedures: some people thought it was too lenient, some people thought it was too harsh. But overall, I think it accomplished what Mandela was trying to do very successfully.

As I said, South Africa was unique among nations in having poor average income, but advance-world infrastructure. Well-educated Whites, and some Coloreds, held the most senior positions at many key organizations: the electric company, the gas company, the water companies, the banks, the railroads, and so forth. But even during the apartheid period, Black South Africans had comprised the bulk of the lower- and middle-level managers in business and industry and the ANC vigorously trained younger Blacks to move up into higher positions, in anticipation of the time when they would take power. The new government continued this process by moving those with the highest skill into more senior positions.

So, that’s the story of how we established South Africa’s rating. It was certainly one of the high points of my time at Moody’s. I remember being overjoyed when they made their application for a rating. I said, “this is going to be good.” It was one of the most interesting ratings we assigned, and the people we met were fascinating.

David H. Levey is an independent political economist and consultant focused on global economic issues, sovereign risk assessment, and the evolution of financial markets. He studied economics and politics at the University of Chicago and Harvard University and has taught at Yale, Wayne State University in Detroit, and The New School University in New York City.

After serving as manager of the Country Review Department at Wells Fargo Bank, David joined Moody’s Investors Service in 1985 as a senior analyst in the Sovereign Risk Unit and a year later was promoted to managing director, a position he held until his retirement in 2004. His team was responsible for assigning credit ratings to bond issues of central governments, non-U.S. regional and local governments, multinational financial institutions, and many state-owned and supported enterprises.

During his time at Moody’s, the number of rated countries grew from twelve to over one hundred, including initial ratings for China, India, Italy, Spain, and Russia, among many others. David was the author of Moody’s Sovereign Rating Methodology Handbook, which became an industry standard.

Among his publications is “The Overstretch Myth” (co-authored with Stuart S. Brown) in the March/April 2005 issue of Foreign Affairs, which discusses the U.S. current account deficit and foreign debt.

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