SA has window to capitalise on lowest borrowing costs in four years

A 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 in March, 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.

SA’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 February’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 SA 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. "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 2017, 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 $3bn of external debt in each of the next three financial 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 Treasury, declined to comment on the timing of any new sale.

SA 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 were little changed at 4.97% as of 9.11am in Johannesburg.

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 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 SA is quite positive, with the change in government and business-friendly Ramaphosa taking over from Zuma."

SA’s dollar spreads over US treasuries are 219 basis points, about 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 SA should issue soon, according to Dergachev.

Moody’s is scheduled to make its announcement a few days after the US Federal Reserve’s interest-rate decision, with markets expecting a 25 basis-points increase.

"The probability of US rates going higher is significant," Dergachev said. "And if they grind higher in an unexpected and fast way, this can affect appetite for emerging-market debt, and this would affect SA’s ability to issue cheaply."