South Africa's debt market should continue to benefit after it becomes the first in Africa to be included in a prominent global bond index.
A welcome boost after violence tarnished the country's investment reputation.
The long-awaited debut in Citigroup's World Government Bond Index – first announced in June but not officially effective until October 1 – puts South Africa alongside 22 other countries on the index, tracked by an estimated $2-trillion worth of funds.
The inclusion offers some comfort to President Jacob Zuma's government as it reels from a wave of strikes mainly in the key mining sector, which helped prompt a credit downgrade from ratings agency Moody's this week.
Twelve South African government bonds with a market value of $93.82-billion will be included, representing 0.45% of the index, Citigroup said this week.
While it is hard to pinpoint how much money fund managers have injected into local debt ahead of Monday's incorporation, analysts reckon WGBI-related demand has accounted for much of the nearly R71-billion worth of bonds purchased by foreign accounts so far this year.
This is nearly double the R41-billion bought over the same period in 2011.
Bonds yields fell to near all time lows this week as demand surged ahead of Monday's official inclusion and analysts see scope for yields to retreat further in the short-term.
Mexico, the most recent emerging market before South Africa to be included in the index in October 2010, saw solid foreign inflows into its debt market for about three weeks after its debut, said Michael Grobler, a fixed income analyst at Afrifocus Securities.
"We've done a case study of South Africa's inclusion compared to Malaysia, Mexico and Singapore that showed we could have an absolute low in yields anything from two weeks prior to the inclusion to as much as a month after," he said.
Japanese fund managers are expected to allocate approximately $1-billion worth of money into South African debt, although uncertainty over the investment climate in Africa's biggest economy will keep investors cautious.
"There are a lot worries. We are seeing mining strikes and escalating political unrest. Country risk is growing in South Africa," Genzo Kimura, bond fund manager at Sumitomo Mitsui Trust Asset Management told Reuters earlier this month.
"In this kind of situation active fund managers can't be too aggressive now."
Moody's Investors Service cut South Africa's government bond rating by one notch to Baa1 from A3 on Thursday, citing worries about the country's institutions as well as future political stability and room for policy manoeuvring.
The downgrade came in the wake of a series of wage strikes over the past weeks that have hit production in the world's top platinum producer and No. 4 gold producer, denting the country's investment image.
But market reaction has been largely muted after the downgrade, largely expected after Moody's, Fitch and Standard and Poor's all lowered the outlook on South Africa's rating to negative from stable.
"The (Moody's) downgrade does not jeopardise the inclusion of South African government bonds in the WGBI, as criteria for exclusion are different from those required for inclusion," Standard Bank analyst Bruce Donaldson said. – Reuters