Investors keep faith in SA debt

Treasury welcomes global market take-up of $5bn bond sale

● “Ultimately, when I price the bond I think of my kids: this is what they will have to pay,” said a Treasury official this week after SA sold a record $5bn of bonds — about R75bn — on international markets, at favourable interest rates.

The bonds, part of the borrowing the government does to fund its deficit, included a 30-year bond which will have to be repaid in 2049 as well as a 10-year bond maturing in 2029. Both were issued at interest rates, or yields, that were significantly cheaper than the government paid when it issued bonds on international markets last year, which shows that investors reckoned the risk of lending money to SA was lower than last year so they were willing to charge less.

A lower yield on a bond means a higher price for that bond.

With the cost of government debt now the fastest-growing item on the government’s spending list, and concerns rising recently about whether it would be able to fund its ever-rising borrowing requirements, the timing and pricing of the bond issue will have been more important than ever.

Four domestic and international investment banks, along with four sets of empowerment partners, acted as book-runners placing the bonds with investors, after new procurement requirements were introduced last year to ensure that small SA-based BEE companies have the opportunity to participate in these complex global transactions.

The success of the bond sale came despite concerns about SA’s ballooning public debt, with the medium-term budget on October 30 expected to show a marked deterioration in fiscal ratios. However, global rather than local factors drove the pricing of this week’s bond issue, which reflected global investors’ enthusiasm to lend to SA and other higheryielding emerging markets at a time when they are earning zero or even negative interest in Europe and the US, where about $14trillion of bonds now have negative yields.

The $3bn of 30-year bonds that SA issued this week were priced at a yield of 5.75%, down from the 6.3% on the 30-year bonds issued in May 2018. The $2bn of 10-year bonds were priced at 4.85%, compared to 5.875% on the 12-year bonds issued last year.

Strong demand from investors prompted the government to add an extra $1bn to the $4bn it had originally planned to issue, some of which had had to be held over from last year because of delays implementing new rules on appointing the banks arranging the deal. The Preferential Procurement Policy Framework Act, which regulates how the government goes out to tender and procures goods and services, was extended last year to classify the sources of funding as part of the procurement regulations.

The Treasury said it mandated Citi and a Deutsche Bank/Nedbank consortium, Rand Merchant Bank and Standard Bank as joint book runners for the bond deal. The empowerment partners for the respective banks are Crede Capital Partners, Rho Capital, Theza Capital and Africa Rising Capital.

Absa Capital economist Peter Worthington said: “The extra $1bn equates to additional deficit financing of about 0.3% of GDP but nonetheless the successful issue may alleviate fears about the government’s ability to finance its deficit, which we think will be 6.1% of GDP (with risks tilted higher) in the current fiscal year. We think the government faces big challenges on this front.”

The Treasury said this week the success of the transaction — believed to be the largest out of sub-Saharan Africa — was “an expression of investor confidence in the country’s sound macroeconomic policy framework and prudent fiscal management”.

Budget projections show that even with the new bond issue, government’s foreign debt is still only about 10% of its total debt, well within its self-imposed 15% target.

Successful issue may alleviate fears about financing the deficit Peter Worthington

Absa Capital economist