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South Africa Has a Timing Problem as It Weighs Eurobond Sale

Updated on
  • Waiting for Moody’s may cost the country if Fed raises rates
  • Investor demand likely to be strong amid rush for Africa debt

South Africa has an opportunity to borrow in international markets at the lowest cost since 2014, capitalizing on unprecedented demand for high-yielding African dollar debt and improving sentiment toward the local economy. There’s just one problem.

Moody’s Investors Service is due to review the country’s credit ratings later this month, and a reprieve would strengthen the government’s hand. But waiting for that risks paying more, with the Federal Reserve almost certain to lift U.S. rates, and with them bond yields globally.

South Africa’s long-term foreign-currency debt is already rated below investment grade by S&P Global Ratings and Fitch Ratings, both of whom also assess the country’s local-currency debt as junk. Moody’s, however, has both ratings on the lowest investment level, albeit with a negative outlook. Revenue and spending measures announced in last month’s budget, the first under new President Cyril Ramaphosa, may have been enough to avert another downgrade, according to Citigroup Inc. and JPMorgan Chase & Co.

Time to Issue Again

South Africa has sold few Eurobonds compared to Egypt and Nigeria in the past year

Source: Bloomberg

“It would make sense for South Africa to wait for that last uncertainty to be lifted to come back to the Eurobond market,” said Delphine Arrighi, a money manager in London at Old Mutual, which oversees $53 billion. “South African Eurobonds have usually traded tight to their peers given the very limited supply, but the avoidance of a further downgrade should be enough to offset the small negative of increased supply this year.”

South African assets have outperformed emerging markets overall since late last year, as Ramaphosa, a businessman and lawyer, maneuvered to succeed Jacob Zuma, whose nine-year rule was marred by corruption allegations and weak growth. The rand has strengthened 23 percent against the dollar since mid-November, the most globally. And South African dollar bonds are among the five best-performers in the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index, which includes more than 70 countries.

The government aims to raise $3 billion of external debt in each of the next three fiscal years, according to the budget statement. Though the funding period only starts on April 1, the country has in the past pre-funded opportunistically. Tshepiso Moahloli, head of liability management at the National Treasury, declined to comment on the timing of any new sale.

South Africa last issued Eurobonds in October, when it sold $2.5 billion of 10- and 30-year securities, and before that in 2016. Yields on the 2027 notes climbed one basis points to 5 percent as of 9 a.m. in London . The government has issued less often since the start of 2017 than other African countries such as Egypt and Nigeria, which have sold more than $18 billion between them. Its foreign debt is less than 10 percent of total borrowings.

“Demand should be very strong,” said Sergey Dergachev, a portfolio manager helping oversee about $14 billion in assets at Union Investment Privatfonds. “South African dollar or euro deals are very rare, and a new issue is a great opportunity to get exposure. Now is good timing since general momentum for South Africa is quite positive, with the change of government and business-friendly Ramaphosa taking over from Zuma.”

South Africa’s dollar spreads over U.S. Treasuries are 219 basis points, around the lowest in more than three years, which would suggest the government could issue at relatively cheap levels. But rising rates in the U.S. mean South Africa should issue soon, according to Dergachev. Moody’s is scheduled to make its announcement a few days after the Federal Reserve’s interest rate decision, with markets expecting a 25 basis-point increase.

“The probability of U.S. rates going higher is significant,” said Dergachev. “And if they grind higher in an unexpected and fast way, this can affect appetite for EM debt, and this would affect South Africa´s ability to issue cheaply.”

(Updates yield in seventh paragraph.)
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