No Sale Time Like Present for South Africa on Cusp of Downgradeby and
Market stabilizing opens opportunity for Eurobond issue
Investors attending Gordhan's roadshow see scope for deal
Now may be as good a time as ever for South Africa to sell Eurobonds for the first time in almost two years.
Finance Minister Pravin Gordhan traveled to the U.K. and U.S. this week to reassure investors and rating companies of his commitment to meet fiscal goals. While the trip was billed as a “non-deal roadshow,” some say an opportunity has opened even as Moody’s Investors Service signaled it may cut the nation’s credit rating to one level above junk.
The government said last month it planned to raise as much as $1 billion in international markets before the end of March, if market conditions allow. That would mean stability rather than lower yields, Tshepiso Moahloli, head of liability management at the Treasury, said on Feb. 24. Since then, rand volatility has dropped, while the premium investors demand to hold South African dollar debt rather than U.S. Treasuries fell as much as 40 basis points to the lowest since mid-December, when President Jacob Zuma roiled markets by firing his finance minister.
“On paper, it was a non-deal roadshow, but having said that, given the recent rally and if they feel they will be downgraded this year, I would not be surprised if they issue over the next few weeks,” Claudia Calich, a money manager at London-based M&G Ltd., which oversees about $1 billion in emerging-market debt, said after attending one of the meetings. “It would be good for them to issue soon, especially as spreads are off the wides, U.S. Treasury yields are still low and they will likely be downgraded this year, the question being by how many notches.”
A dollar-denominated sale by South Africa would be only the eighth by a developing country this year. International dollar issuance by emerging-market nations this year is down 56 percent from the corresponding period in 2015, according to data compiled by Bloomberg, as the prospect of rising interest rates in the U.S. lures capital away from higher-risk assets.
South Africa last sold dollar bonds in July 2014, when it issued $1 billion of securities maturing in 2044 at a spread of 220 basis points above comparable U.S. Treasuries. That spread has since widened to 318 basis points, suggesting the nation’s borrowing costs would rise in a sale this month. In South Africa’s favor is its relatively low ratio of foreign debt to gross domestic product, at just 5.4 percent, compared with 33 percent for Turkey.
Africa’s most-industrialized economy is at risk of losing its investment-grade status, with growth forecast to slow to less than 1 percent this year. Confidence also hasn’t recovered since Zuma decided in December to install little-known lawmaker David van Rooyen as finance minister, causing the rand and bonds to plunge as investors fretted about his commitment to fiscal targets. Zuma backtracked four days later, re-appointing Gordhan to the position he had held from 2009 to 2014.
Moody’s on Tuesday placed South Africa’s Baa2 rating on review, saying could lower the assessment if it sees signs authorities aren’t committed to fiscal restraint. A downgrade by Moody’s would move its rating to one level above junk and on par with that of Standard & Poor’s, which has a negative outlook and is reviewing the rating in June, and Fitch Ratings Ltd.
“Investors remain very worried on the politics and their views are not really shifting on the inevitability of a downgrade,” said Peter Attard Montalto, an economist at Nomura International Plc in London, who said he had spoken to investors who attended the meetings. “This trip, though, will help to get a bond issuance away without having to pay up for it too much. They will want to get something away before the June ratings updates.”
The rand has rallied 25 percent since plunging to a record on Jan. 11. The currency weakened 0.3 percent to 15.2631 per dollar by 5:07 p.m. in Johannesburg. Yields on benchmark dollar bonds maturing in Sept. 2025 have dropped 44 basis points this year to 5.14 percent. The JPMorgan EMBIG South Africa Sovereign Spread has narrowed 116 basis points to 409 since reaching a seven-year high in January.
‘‘With the rand starting to appreciate from the really oversold levels, it might be a good time to test the market internationally,” Asief Mohamed, chief investment officer at Aeon Investment Management Ltd., said by phone from Cape Town. “It would create some sort of perception of confidence in South Africa. There are investors out there that will take up the bond issue. Relative to the political risk, they’re prepared to take an investment.”