Rand Chaos Opens Window for Eurobond Sale: South Africa CreditMike Cohen and Robert Brand
South Africa plans to sell its first foreign-currency bond in 18 months, with analysts forecasting the rand will rebound from a four-year low, reducing the government’s repayment costs.
The rand has declined about 17 percent against the dollar and euro this year, the worst performer of 16 major currencies monitored by Bloomberg. The premium investors demand to hold South Africa’s $1.5 billion dollars of bonds due January 2024 rather than similar-maturity U.S. Treasuries widened 54 basis points in the same period to 245, the highest in a year. The spread climbed from a record low of 154 in August.
Near-zero benchmark lending rates in developed markets make it cheaper to borrow offshore than in South Africa, where the rate is currently 5 percent, assuming the currency doesn’t weaken further. Foreign debt amounts to 8.7 percent of total borrowing, according to the National Treasury, below the 25 percent margin it regards as too risky.
“In this kind of environment, borrowing offshore is not too bad an idea,” Rian le Roux, chief economist of Old Mutual Investment Group, South Africa’s largest private money manager with about $48 billion under management, said by phone from Cape Town on June 7. “The rand is already weak and South Africa has very little foreign debt.”
The currency may advance almost 12 percent to 9 per dollar by the end of 2014, according to the median estimate of 28 analysts in a Bloomberg survey. It weakened 1.9 percent to 10.1561 per dollar as of 6 p.m. in Johannesburg.
The rand has been battered by mining strikes, which curbed output from the industry and growth in Africa’s largest economy. Both Finance Minister Pravin Gordhan and central bank Governor Gill Marcus said this month that the currency’s declines may be overdone.
Standard Bank Group Ltd., Deutsche Bank AG, Rand Merchant Bank and Investec Ltd. have been appointed to arrange the bond sale, the National Treasury said in a statement on June 4. It didn’t specify the size or currency of the sale.
South Africa’s Feb. 27 budget provides for $1.5 billion to be raised in foreign markets to fill a budget deficit of 5.2 percent of gross domestic product in the fiscal year through March 2013. The government repaid a 1.25 billion euro-denominated ($1.65 billion) bond last month, according to the Treasury.
Monale Ratsoma, the Treasury’s chief director of liability management and Tshepiso Moahloli, the director of foreign debt management, weren’t available to comment on June 7.
“The sentiment globally is that markets expect interest rates to move up, with the yield curve shifting up, especially at the long end,” Asief Mohamed, who oversees about $112 million in assets as chief investment officer of Aeon Investment in Cape Town, said by phone on June 7. “It is going to be difficult to attract a lot of interest. It could cost them more than they expect.”
The cost of protecting South African dollar-denominated sovereign debt against non-payment for five years using credit-default swaps fell five basis points, or 0.05 percentage point, to 197 on June 7. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements, climbed to the highest in a year on June 6.
Yields on government rand bonds due September 2026 rose 33 basis points to 8.28 percent today, the highest in a year, after reaching a record low of 6.60 percent on May 9.
“Our spreads have widened and the currency has fallen out of bed so it’s a brilliant time to be issuing abroad,” Malcolm Charles, who helps manage about $3 billion in fixed-income securities at Investec Asset Management, said by phone from Cape Town on June 7. “It will be absolutely gobbled up. South Africa has got very little foreign debt and people like the diversification.”