March 3 2011 - Business Report - By Ethel Hazelhurst
The success of South Africa’s bond issue on international capital markets, late on Tuesday, is a sign of investor confidence in the economy, according to analysts.
The National Treasury said yesterday that the $3 billion (R21bn) in bids received amounted to four times the value of the $750 million, 30-year global bond deal. And the 6.25 percent interest rate government would pay was only 180 basis points higher than the rate on 30-year US Treasury’s benchmark bonds.
That all this was achieved in a three-hour teleconference with investors is a sign that investors “know who we are”, according to Trevor Barsdorf, a market analyst at Econometrix Treasury Management.
The spread or gap between US treasury bonds, seen as risk-free, and all other bonds is a measure of the risk attached to them. Ian Cruickshanks of Nedbank Capital said the narrow spread reflected that South Africa’s risk “is rated very low”.
As was the case last year, the Treasury has completed its offshore borrowing programme ahead of the fiscal year – which starts next month.
The interest rate, technically known as the coupon, compared favourably with the coupon of the 10-year global bond issued last year at 5.50 percent – a rise of only 75 basis points for a bond with a longer term to maturity. Because the bonds only mature in 30 year’s time, the issue makes South Africa’s financial position even more stable.
Barsdorf said South Africa’s growth outlook and the revenue this was likely to generate for state coffers was among the attractions for investors in government bonds.
Cruickshanks said the reason South Africa was seen as a good risk is that it had achieved a track record for “fiscal discipline”, which allowed it to remain relatively underborrowed.
Though the Treasury last month projected that South Africa’s gross debt, as a percentage of gross domestic product (GDP), would rise from 37.1 percent of GDP currently to 43.1 percent over the next three years, this ratio is still much lower than those of the major economies. The US ratio is about 100 percent and Japan’s more than 200 percent.
Cruickshanks said the bond issue would not directly affect the rand. “It could take as long as a month for the money to come in and then it won’t flow into the market. The Treasury will place it directly into its account with the Reserve Bank.”
However, the favourable sentiment, along with the strong gold price, is likely to support the local unit, which has firmed on dollar weakness over the past week. The unit gained more ground yesterday, closing at R6.8918 to the dollar.
The Treasury noted: “Like last year’s bond issuance, this deal was not preceded by an extensive roadshow. The deal benefited from the initiatives by the National Treasury over the years to maintain sound investor relations.”
Giving details, the Treasury said it was “done in one day, with the book only opened from 5pm South African time and closing three hours later on Tuesday evening”. It said 156 investors placed orders, with 68.6 percent from the US, 1.62 percent from South America, 18.2 percent from Europe and 11.6 percent from Asia.