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20 Apr 2012 00:26
South Africa could look forward to greater investment inflows should local government bonds be included in Citigroup’s world government bond index.
Based on the size and South Africa’s potential weighting in the index, this could mean an inflow of $5-billion to $7.5-billion, said Ian Cruickshanks, head of treasury strategic research at Nedbank Capital.
He said many foreign investors already had money in South Africa because of the positive yield differential on local bonds.
But other investors tracking the index would pick up a stake in local debt, he said.
The market value of the bonds included in the index is $19-trillion, whereas the market value of eligible South African government bonds is more than $88-billion, according to a Citigroup note released this week.
Should the South African bonds be included in the index, their projected weighting would be 0.44% in the index.
“It’s a positive move for South Africa’s debt standing in world markets and is thanks to government’s prudent fiscal policy,” said Cruickshanks. And that was despite South Africa’s ratings outlook being downgraded by credit ratings agencies Moody’s, Standard & Poor’s and Fitch, he added.
If South African bonds do make it on to the index, it could ultimately ease the cost of funding in the country, particularly in the light of the state’s plans to spend billions on infrastructure in the fields of transport, logistics and energy.
Cheaper funding would also boost state-owned entities such as Eskom and Transnet as they continue their capital expansion projects.
The treasury welcomed the move and said: “Should Citigroup decide to include South African bonds in the world government bond index, it would further aid South Africa and its state-owned companies to raise funds for the huge infrastructure programme.”
The cost of the state’s infrastructure plans has been budgeted at R845-billion over the medium term.
The United States-based Citigroup states in the note that South Africa’s bonds satisfy the three requirements for inclusion—size, credit quality and the lack of barriers to entry. It says South Africa will be monitored in May and June and, if it continues to meet these standards, it could be included in the index by October.
Cruickshanks said this could also make it easier for the treasury to fund the government’s budget deficit. In the 2012-2012 financial year, the deficit, or the difference between the government’s income and expenditure, is 4.6%. It is set to fall to 3% by 2014.
The index includes 22 countries and South Africa would be the first African state to be included. It would be among other developing nations such as Malaysia, which has a bond market value of $73-billion, and Mexico with $128-billion, as measured by Citigroup.
The heavyweights on the index remain the likes of Japan and the US are the heavy weights on the index, with the market value of Japanese and US government bonds included in the index sitting at $6.2-trillion and $5.5-trillion, and weighted at 31.22% and 27.85%, respectively.
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