Lead managers were first appointed in October 2015, but the issue was scrapped due to market volatility before a 750m euro bond redemption on 4 April prompted a re-think
The last time the South African National Treasury issued a global bond was in July 2014, even though the February 2015 Budget made provision for issuance of at least $1 billion in the international capital market in the 2015/16 fiscal year.
The most favourable time generally for sovereign bond issuance is in January, as that is when bond investors are cash flush and seeking a home for their money. When the South African National Treasury issued a $1.5 billion 12-year global bond in January 2012 it was priced at a coupon rate of 4.665 percent, which represented a spread of 270 basis points above the 10-year US Treasury’s benchmark bonds.
In April 2016, the South African National Treasury issued a $1.25 billion 10-year global bond at a coupon rate of 4.875 percent, which represented a spread of 335 basis points above the 10-year US Treasury’s benchmark bonds.This is considerably better than earlier this year when the premium foreign investors demanded to hold South African dollar debt rather than US Treasuries reached a seven-year high of 525 basis points on January 20 2016. The yield on South Africa dollar bonds due in September 2025 was 5.99 percent then, but eased to 4.72 percent earlier this week.
South Africa thereby beat Kenya to the international capital market to become the first African country to issue an international bond this year. Kenya said earlier in April that it would test the waters and become the first African country to tap global debt markets in 2016.The World Bank has praised Kenya for its strong growth, a solid agriculture sector, and infrastructure investment so there was expected to be good demand for the Kenyan bond.
African governments issued $15.5 billion in 2015, 22 percent lower than 2014 and the lowest level since 2012 as depreciating currencies, the oil price collapse and the slowdown in Chinese economic growth cut foreign investors’ appetite for African bonds.
Nigeria plans to borrow up to $5 billion this year as it struggles to close the gap between declining revenue sparked by the recent fall in oil prices and continuing high expenditure needs.
The South African National Treasury had appointed Standard Bank, Rand Merchant Bank and Citi as joint-lead managers and Investec as the co-lead manager to arrange the issuance of a foreign currency denominated bond on 9 October 2015. The bond was going to form part of the government’s financing of its foreign currency commitments as stipulated in the Budget 2015.
The Treasury said at the time that the government’s foreign currency commitment for 2015/16 amounted to $1.455 billion of which $756 million had already been paid for the fiscal year to date from the government’s foreign exchange deposits held at the South African Reserve Bank for foreign exchange reserve purposes.
Market volatility ahead of the US Federal Reserve’s first interest rate hike in December 2015 however saw the issuance scrapped, even though with hindsight this was the wrong call.
Nobody at Treasury could have foreseen the turmoil caused by the firing of Finance Minister Nhlanhla Nene on 9 December 2015, which roiled South Africa’s capital markets and severely dented foreign investor confidence. The next Finance Minister, David van Rooyen, lasted only four days before he was replaced by the former Finance Minister Pravin Gordhan.
Finance Minister Pravin Gordhan travelled to the UK and US in early March 2016 after he had presented the February 2016 Budget to meet foreign investors and reassure them that fiscal policy was in capable hands.
Investor confidence in South Africa as reflected in rising capital market yields has been undermined by slowing growth and the consequent pressure on the fiscus that failed to meet its deficit reduction targets due to slowing revenue growth. This has prompted downgrades of South Africa’s sovereign credit rating.
Moody’s, which currently rates the sovereign two notches above junk, has placed South Africa on review for a cut, citing concerns about the government’s ability to meet fiscal deficit reduction targets which rely on stronger growth in future years. Standard & Poor’s and Fitch, whose grades are just a notch higher than sub-investment grade, have also hinted at downgrades if acceleration in growth is not forthcoming.
South Africa might, however, be forced to borrow at a higher spread above US Treasuries if it loses its investment-grade credit rating because of persistently weak growth and large deficits, so issuing now made sense. In addition, foreign reserves had to be replenished following the redemption of a 750 million euro bond on 4 April.
The Treasury said: “The South African government sees the success of the transaction as an expression of investor confidence in the country’s sound macro-economic policy framework and prudent fiscal management.”
Unlike July 2014, the Treasury did not mention the “stable political environment” given the calls for President Jacob Zuma to resign after the Constitutional Court ruled that he had “had failed to uphold, defend and respect the Constitution” as the supreme law of the land in contravention of section 83(b) of the Constitution.
A statement similar to then-Finance Minister’s Nene:“While we are pleased with the confidence that the investors have shown in the sovereign, we are cognisant of our immediate challenges and can therefore not afford to be complacent as a country”, was also missing this time.