The government tapped the international market this week for the first time since April 2022, raising $3.5bn with the sale of dollar-denominated bonds to international investors.
SA joins five other Sub-Saharan African sovereigns that have gone back to the so-called Eurobond market — the hard currency debt market — in 2024. Last year, not one country in the region ventured into that market due to high global interest rates, not to mention the “African risk premium” and their own fragile finances made it so prohibitively expensive.
SA’s bond market issue is in a different league from its regional neighbours in terms of size, and the length of time for which investors are willing to lend to it. While most others have been able to issue only seven-year bonds, SA issued a 30-year and a 12-year bond, at pricing that was much better than it achieved in 2022.
The government needs to raise at least a few billion in hard currency annually to service its foreign debt and pay various foreign bills, and next year, as it happens, SA needs to repay $3.25bn of maturing government and Eskom bonds, which by this week it has in the bag.
But it managed to stay out of the international market for the more than two years of steep global interest rates because of a pivot in the government’s borrowing strategy that went back to 2020, when the Covid-19 crisis prompted the government for the first time to take advantage of low interest concessional loans from the IMF, World Bank and New Development (Brics) Bank.
Now, it plans to pivot again, with the Treasury planning for the first time to borrow on the market specifically for infrastructure investment. All of which creates a different context for the conventional international bond issue, which now is just one of a more diverse set of instruments the Treasury uses in its funding strategy.
Meanwhile, SA’s absence from international bond markets for more than two years created a scarcity value for its bonds that could only make it more attractive to borrow again when the time and the pricing was right. The Treasury had said in last month’s medium-term budget that it would raise $3bn on international capital markets in the current fiscal year that ends on March 31, and $15bn over the medium term from international financial institutions, multilateral development banks and the market.
These issues are always a matter of timing, and it’s often hard to judge whether the Treasury and the banks that arranged the bond issue got it right. There were only narrow gaps in which SA could have approached the market by the March deadline. Arguably, it could have done a bit better in terms of pricing a few weeks ago, before the US elections. But it could have done much worse after Donald Trump’s inauguration on January 6. Treasury and its bankers took the gap this week.
The rate or yield on a country’s dollar bonds is driven primarily by the yield on US treasuries, which is deemed the risk-free rate, on top of which investors demand a spread or premium to compensate them for country-specific risk. In SA’s case, that country risk premium has narrowed since the government of national unity was inaugurated and that reflected in a much lower spread this time, particularly on the longer-term borrowing.
The new 12-year bond placed at 7.1%, which was a spread of about 258 basis points to where equivalent US treasuries were trading on the day. That compares to a spread of about 309 basis points on the 10-year dollar bond SA placed in 2022. On the 30-year, the spread this time of about 340 basis points was down from about 447 basis points last time.
That doesn’t mean the money was cheaper in absolute terms, given that US treasury yields have about doubled over the period. But it was at the best end of the bankers’ scenarios, which doesn’t unfortunately mean the money is cheap in absolute terms, with US treasury rates having doubled over the period.
Foreign debt is still only about 10% of government’s R5.6-trillion of debt, but it will edge up over the medium term as the Treasury takes advantage of further concessional lending, as part of an effort to cut the government’s high cost of borrowing and tap into new pools of capital that might be available to SA.
Since the Covid-19 crisis pivot, the government has borrowed more than $11bn from international financial institutions and multilateral development banks, which not only lend at lower interest rates than SA can obtain on the market but usually offer three-year grace periods before payments come due.
A big chunk of that borrowing has been climate-linked finance from the World Bank and the development finance arms of the German, French and Canadian governments. Another €400m from France was announced this week. These are so-called development policy loans, which carry a just energy transition label and reward SA for its progress on the energy transition, but in practice go straight to the public purse to finance the deficit, rather than being ring-fenced for specific projects.
That makes the Treasury’s plan to issue infrastructure bonds on international markets all the more interesting. This was one of the new funding options for the infrastructure investment that the medium-term budget made a priority. It could allow the Treasury to tap into the large and growing pools of capital globally that target infrastructure bonds, “green” bonds and other ESG-type investments.
It would also help to protect infrastructure budgets, which tend to be the first to go when the government cuts spending. The idea is that the Treasury would go to the market, as well as to concessional lenders, to raise funding for large infrastructure projects under the budget facility for infrastructure. The money would go into the public purse, but it would be ring-fenced. Investors would be able to link their investment decisions directly to specific projects, or portfolios of projects, the Treasury promised in the budget.
Whether that will make the money cheaper is a question. But the focus is at least moving from how best to borrow it to how best to spend it to boost growth. Ultimately that should in itself help to fix the public finances and lower the cost of borrowing.
• Joffe is editor-at-large.
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