SA and Nigeria plan sovereign bonds

South Africa and Nigeria intend to issue sovereign bonds worth $2.5 billion (Sh188 billion), indicating their confidence in the global financial markets that may be emulated by other prospective issuers, including Kenya.

South Africa is seeking $2 billion (Sh150 billion) while Nigeria has concluded arrangement to float Sh38 billion ($500 million).

Both countries have waited for the market to cool after the turmoil that has ravaged them in the last one-and-a half years.

Kenya postponed its Sh38 billion ($500 million) eurobond initially set to be issued in financial year 2008/9 because of the turmoil that gripped key source markets for capital.

But Treasury officials have promised that the Kenya sovereign bond would be issued as soon as circumstances in the global markets improve substantially.

Already advanced markets have shown signs of having recovered although consumption and production is still weak and there has been talk of a double-dip recession — where an economy seems to recover only to slip back into recession.

Nigeria’s Debt Management Office announced in last month that it had concluded arrangements to float the country’s first international sovereign bond.

An approval by the Nigeria’s federal parliament is still being awaited before the issue can be unrolled.

New York-based Moody’s Investors Service said in an e-mailed press release that it had assigned South Africa’s issue a strong (A3) rating to the new $2 billion issue— which is at 5.5 per cent interest — indicating it is prudent to invest in it.

The rate is the lowest the country has ever paid for dollar borrowing but any slippage in fiscal prudence and political upheaval could attract a risk premium.

Income disparities and poverty in SA are seen as political risky factors.

SA Finance Minister Pravin Gordhan announced in his February 2010 budget speech that the government would be accessing the global bond market more frequently in the next few years for funding.

Kristin Lindow, Regional Credit Officer for Europe and Africa in Moody’s Sovereign Risk Group said: “We expect the government to issue at least one bond every year for the coming three years, given its increased financing needs following the recent recession.”

Moody’s said the South African government will continue to have relatively low vulnerability to external debt, even with the planned issuance, since it is starting from a low base.

As a proportion of its total debt, foreign currency debt will actually decline because of increased borrowing requirements domestically.

At a national level, external vulnerability is also quite low compared to the country’s A-rated peers, in spite of ongoing current account deficits.

The Reserve Bank of South Africa has been accumulating foreign exchange in the past seven years.

This is because its capital account, showing long-term investment forex inflow surpluses regularly exceeded the current account (difference between exports and imports) deficits, and its net reserves position is in surplus by nearly $39 billion.

Ms Lindow said global crisis hit South Africa just as the economy was coming off a cyclical peak after a long expansion leading it to have a 1.8 per cent contraction.

“The recovery in the last few months, while coming later than that of the global economy, has been unexpectedly robust,” she said. “However, growth is likely to settle in at a slower pace of around 3.5 per cent in the coming years than the five per cent that was registered in the four years leading up to the crisis.”

The weak recovery is a result of weaker global demand, higher unemployment and less-rapid local credit expansion – this being partly due to burdened household balance sheets.

“The government’s own balance sheet has been hit hard by the recession,” said Lindow. “The medium-term outlook for government finances also has deteriorated significantly due to higher spending but mainly, lower revenues. As a result, after a decade of consistently declining debt ratios, the government’s deficits and debt have started to rise regardless of which indicators one chooses.”

Moody’s said that fiscal consolidation will progress less quickly in the years ahead compared to the pre-crisis period, in view of the slower rate of growth.

“Given the country’s socio-economic problems, including high poverty and wide income disparities, the other potential risk factor for South Africa is political,” said Ms Lindow. “Still, as far as the macroeconomic policy framework is concerned, the Zuma administration’s first budget matched the determination of its predecessors in affirming a fiscally responsible agenda and rejecting demands from its left-wing partners for larger deficit spending.”