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Capital Markets

South Africa: Bond market gets WGBI fillip

Inclusion might trigger $8.8 billion inflows; Becomes first sub-Saharan entry

South Africa’s entry into Citigroup’s benchmark government bond index looked set to trigger billions of dollars of additional inflows into the market. In April, the domestic South African Government Bond Index fulfilled all three requirements for entry into Citigroup’s World Government Bond Index (WGBI).

If the criteria – size of market, credit quality and lack of barriers to entry – are still met in May and June, the asset class will be included in the WGBI, effective October 2012, managers of the index said. With an estimated $1.5 trillion to $2 trillion of funds tracking the WGBI, some $8.8 billion from index trackers alone could flow into the rand government bond market as a result of entry to the global index, says Peter Attard Montalto, an emerging market analyst at Nomura.

Historically, real-money emerging market-focused investors have had large exposures to the South African sovereign. But the market has attracted an increasingly diverse and mainstream global investor base in recent years, given the wide interest rate differential between the developed world and South Africa. In 2011, non-residents purchased $6.2 billion-worth of fixed-income securities, following a record $6.7 billion the year before.

Percentage of outstanding local currency government bonds held by non-residents in South Africa 
Source: Reserve Bank, I-Net, JSE, Credit 

The country’s eligible debt stock, at $88 billion, is now above the $50 billion minimum threshold, while the sovereign is rated A/A3, above the A-/A3 minimum credit criterion, and the market is fully liberalized for foreign investors. South Africa also becomes the first sub-Saharan African country to gain inclusion in the index. Elsewhere on the continent, "demand for African domestic government bonds is growing but from a very low base," says Samir Gadio, African markets strategist at Standard Bank.

At some $64 billion, the Nigerian domestic bond market contributed the bulk of sub-Saharan Africa’s investable local-currency-denominated debt stock outside South Africa: compared with about $6 billion in Ghana, for example. In a bid to reel in foreign portfolio flows, Nigeria scrapped its one-year tenure limit on foreign holdings of naira-denominated government bonds last June.

In Kenya, treasury bills yielded up to 20% in February – providing a lucrative carry trade for foreign investors – after aggressive rate increases to stem rising inflation. In Ghana, as of July 2011, foreigners owned about 29% of the total outstanding government debt stock. Rising oil production and the economy’s subsequent expansion should increase foreign investor interest in Ghana’s market, says Gadio.

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