SA May Tap International Capital Markets To Finance Budget Deficit


Following the slow growth of the country’s economy alongside the weak rand, South Africa might for the first time in almost two years, be looking for financial aid from international capital markets to finance its widening budget deficit after a bond rally reduced borrowing costs.

According to Business Day, an individual who chose not to disclose his name revealed that Citigroup, Rand Merchant Bank and Standard Bank have been picked by the government as joint lead managers and Investec as a co-manager for a call with investors yesterday.

SA may choose to sell a benchmark-sized dollar bond due in 2026, the person said.

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As earlier noted by rating agency, Moody’s had in its decision last month to place SA’s investment-grade rating on review for a reduction, the country’s financing needs have today, become pronounced as its budget deficit increased to an average of about 4% of gross domestic product in the past four years.

SA, which last sold dollar debt in July 2014, included plans in the budget announced in February to raise $1bn abroad.

Speaking on this, a money manager at Aberdeen Asset Management in London, Kevin Daly, who helps oversee $10bn in emerging-market debt said this will be a good start

“Yields are generally very low and you have decent market demand,” Mr Daly added.

However, the premium investor’s demand to hold South African dollar debt rather than Treasuries, has narrowed 145 basis points since touching a seven-year high on January 20 to 380 basis points, according to JPMorgan Chase indices.

In that period, yields on SA’s dollar bonds due in September 2025 fell more than 127 basis points to 4.72% early in the afternoon on Wednesday in Johannesburg.

“It’s going to depend on the market conditions, on the prospects for a Eurobond sale; If the market is right, in other words, we think we will get a good coupon, we will do it,” director-general of the Treasury Lungisa Fuzile said on Wednesday

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Meanwhile in relation to the issue of the country’s finance for budget deficit, rating agency Standard & Poor’s (S&P) yesterday slashed its growth prospects for South Africa this year from 1.6 percent to 0.8 percent, warning that slow economic growth was putting pressure on the country’s credit rating.

The agency gave a grim picture of the country’s growth prospects, charging that a range of adverse global and domestic factors had weakened the macroeconomic outlook.

The agency pointed out that economic growth last year slowed to 1.3 percent, less than the estimated rate of population growth, implying a contraction of output per capita by 0.4 percent.

“The factors that weighed on the growth in 2015 are still in play: Prices for South Africa’s export commodities slumped again between October 2015 and January 2016, with iron ore down by more than 20 percent and platinum by 12 percent,” S&P senior economist Tatiana Lysenko said.

She said economic growth in South Africa had been on a downward trend since 2011 with feeble economic prospects weakening the sentiment of domestic and foreign investors but that the agency expected most commodity prices to remain depressed, largely due to weaker demand from China, which is South Africa’s biggest export destination.