The fixed-income market in South Africa is by far the largest on the continent, accounting for 96% of the value of all African bonds, and it has exhibited significant growth in recent years, with the value of notes in circulation reaching about R1.4trn ($170.7bn) in 2012, up from R650bn ($79.2bn) in 2004. Around two-thirds of this total is accounted for by sovereign issues, with the balance accounted for by state-owned entities (SOEs) and the private sector, at 16% and 20%, respectively. Bond trading is available on the Johannesburg Stock Exchange (JSE), which also offers over-the-counter depository services and a variety of bond-based derivatives, including bond futures, forward-rate agreements, vanilla swaps and standard bond options.

Sovereign Borrowing

According to the IMF, South Africa’s government debt is mainly denominated in rand, mostly long-term and increasingly held by foreigners. As of 2012, the state’s debt burden stood at about 41.2% of GDP, although inclusion of implicit guarantees to SOEs – led by Eskom, Transnet, RandWater and the road agency SANRAL – brings that figure to above 60%, ratings agency Fitch has reported. The government is expected to continue to issue debt as it refinances maturing bonds and funds both its fiscal deficit and the capital expenditure needs of its state-owned entities. Indeed, the government’s non-SOE debt burden is forecast to grow to 42.2% by March 2014, according to local lender NedBank, peaking at 42.7% in 2015. Meanwhile some R340bn ($41.4bn) of public debt maturing between 2017 and 2020 is set to be refinanced by longer-maturity instruments in 2013. To meet its borrowing needs, the government may also tap the growing international Islamic finance markets. In July 2012 the treasury announced its intent to issue a five-year, dollar-denominated sukuk(Islamic bond) in the $ 500m700m range. It contracted six financial advisors, including South Africa’s Standard Bank, BNP Paribas and Saudi Arabia-based Albaraka Banking Group, to assist.

Corporate Bonds

Private corporate debt is mainly issued by banks, which make up around 75% of such notes, with insurers, industrial firms and telecoms companies accounting for 5% each and the automotive industry accounting for another 4%, according to Absa Capital. Sales of corporate bonds rose some 54% year-on-year in 2012 to R85.6bn ($10.4bn), driven primarily by the larger banks raising new capital to meet Basel III requirements. Standard Bank led the way with 15 bond issues worth a combined R18bn ($2.2bn), up from R8.9bn ($1.1bn) in 2011, followed by Absa Bank’s sale of R7.5bn ($914.3m) in bonds, up from R4.9bn ($597.3m) in 2011. While the market saw smaller issues from other firms, like retailer and consumer lender JD Group’s R1bn ($121.9m) float in October 2012, South African businesses have hesitated to issue debt. While some corporates have tapped offshore markets for their funding, including Transnet’s $1bn, 10-year bond in July 2012, there is a preference for equity issuance over debt. “South African corporates as a whole, which are particularly cash rich in 2013, have a clear preference for equity over bonds,” Mark Brits, the general manager for banking and financial services at the Banking Association of South Africa, told OBG.

Foreign Liquidity

With its current account deficit rising to 6.4% of GDP in 2012, South Africa’s balance of payments has become increasingly dependent on portfolio inflows, particularly into the bond market.

Local asset management firm Stanlib estimated in January 2013 that the country relied on inflows of some R10bn ($1.2bn) to R12bn ($1.5bn) a month to finance the current account deficit. While foreign capital was once directed to equity markets, rather than bonds, this is now reversed. “We have seen a resurgence in foreign demand for domestic sovereign bonds in 2012,” Jeff Gable, managing principal and head of Africa non-equity research at Absa Capital, told OBG. Indeed, in 2012 foreigners purchased some R96bn ($11.7bn) in domestic South African bonds, up from R42bn ($5.1bn) in 2011.

This pushed returns to 16%, up from -1% in 2009, 15% in 2010 and 8.8% in 2011, according to the JSE, and this has lowered the government’s borrowing costs.