South Africa Sees Receptive Market for $3 Billion Bond Sale

South Africa plans to tap international markets for as much as $3 billion as the country seeks to take advantage of relatively low rates and strong demand from yield-hungry investors.
“We will be coming shortly and taking advantage of the favorable market conditions,” Tshepiso Moahloli, chief director of liability management at the National Treasury, told reporters in London after meetings with investors. “The market is conducive and we’re keen to access that. We are opportunistic in terms of the approach we take.”
South Africa budgeted to raise $3 billion in international markets in the next fiscal year. Though the funding period only starts on April 1, the country has pre-funded in the past. African sovereigns including Kenya, Nigeria and Senegal have sold $10.7 billion of Eurobonds in 2018, already more than half the record $18 billion they managed last year and exceeding the total for the whole of 2016, with record demand from investors.
South African assets have outperformed emerging markets overall since late last year, as Cyril Ramaphosa, then deputy president and a former businessman and lawyer, maneuvered to succeed Jacob Zuma as president. The rand has strengthened 22 percent against the dollar since mid-November, the most globally, as the government moved to rein in the budget deficit, cut debt and stimulate growth. South Africa’s foreign debt is less than 10 percent of total borrowing.
The country’s dollar spread over U.S. Treasuries is 237 basis points, down from as high as 320 in mid-November and compared with 311 for similarly rated Turkey, according to JPMorgan Chase & Co. indexes. The average for emerging-market countries is 312.
“South Africa traditionally has been relying more on domestic funding rather than external, which explains why South African Eurobonds trade so tight compared to some of their peers like Turkey,” said Delphine Arrighi, a London-based portfolio manager at Old Mutual Global Investors Ltd. “The credit story is finally improving after years of slow deterioration. Increased external debt supply should be met with decent appetite from offshore investors.”
South Africa last sold Eurobonds in September, when it issued $2.5 billion of notes maturing in 2027 and 2047 in September. Yields on the 2027 securities climbed two basis points on Tuesday to 5.04 percent.
“South Africa has always enjoyed not oversupplying the market with paper,” Moahloli said. “I think at $3 billion it is comfortable and I don’t think we should push it beyond that.”