SA has a timing problem as it weighs eurobond sale

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 US 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 and JPMorgan Chase.

“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 $53bn.

“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, manoeuvred to succeed Jacob Zuma, whose nine-year rule was marred by corruption allegations and weak growth.

The rand has strengthened 23% 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 $2.5bn of 10- and 30-year securities, and before that in 2016. Yields on the 2027 notes climbed two basis points to 4.99% as of 15:16.

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 $18bn between them. Its foreign debt is less than 10% of total borrowings.

“Demand should be very strong,” said Sergey Dergachev, a portfolio manager helping oversee about $14bn 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 US 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 US 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 US 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.”