interest rates fall
Simon Segal
This week saw the launch of a 100-million 10- year Eurosterling bond issue at 9,38%, 190 points above the equivalent British benchmark
It is the government of national unity’s third foreign loan. In June government raised Y30- billion in a Japanese samurai bond at 5%. In December 1994, $750-million was raised at 9,7%, then 193 basis points above the equivalent United States Treasury rate. This week the issue is trading at 175 points above the five year Treasury rate. At one stage last year the bond was trading at a premium as high as 350 points above the Treasury rate.
The conclusion from this week’s issue must be that government’s credit rating is at similar levels to December 1994.
Are these loans worth it? Consider this week’s pound issue. Amalgamated Banks of South Africa (Absa) estimates that the full annual cost, including 10-year forward cover, is around 13,95%. Locally, 10-year government bonds trade at around 13,65% this week. Absa calculates that the annual cost of the five- year eurodollar loan is around 14,4% compared to the 13,4% at which the South African equivalent trades this week.
But it is not simply the numbers that determine whether government should raise offshore money. Government’s priority in going offshore is to test the market and establish a presence and benchmark for South African corporate borrowers.
Some economists are sceptical about this argument. Notes economist Edward Osborn: “Loans that indulge in additions to the public debt just for the sake of it are unnecessary.”
He quotes the famous example of the 10-year DM200-million loan that South Africa raised in 1983. On maturity in 1993 the annual cost averaged 56% when interest, the rand’s devaluation and its redemption were added up.
Osborn is critical of any foreign loan that does not augment South Africa’s export capacity to service the loan. At present, government loans augment reserves without boosting the economy’s export capacity.
Eskom and Transnet have also raised offshore money — Eskom Y30-billion in October (a four-year loan at 3,1%) and Transnet Y20- billion in December (3% for five years). Add this to government’s three issues, Frankel Pollak economist Mike Brown calculates that international bond issues under the new government total R6,6-billion.
Over the life of South Africa’s new government, Brown calculates that 26 foreign loans issued by South African financial institutions and private placements have raised a total R3-billion. The largest are Liberty Life’s $320-million convertible bond issue in July 1994 and Standard Bank’s $250- million Euro-commercial paper programme of October. The smallest is Portnet’s three-year $30-million loan last June.
Raising money offshore is becoming less attractive with interest rates in South Africa falling and the Reserve Bank increasing the effective cost of forward cover as it withdraws from the forward market.