South Africa joins Citi bond index

1 October 2012

South African government bonds became the first African government bonds to be included in Citigroup’s influential World Government Bond Index on Monday, a development that could boost investment inflows while reducing the cost of borrowing for the country.

The US investment bank confirmed in June that the South African Government Bond Index would be included in its World Government Bond Index (WGBI), saying it had satisfied all three WGBI requirements of size, credit, and lack of barriers to entry.

“We are delighted to welcome South Africa into the WGBI,” Ernest Battifarano, Citigroup’s global head of index development and production, said in a statement last week.

“There are 12 South African government bonds in the index, with a market value of US$93.82-billion, and their appearance in the WGBI affords the opportunity to investors to gain exposure to this exciting market.”

South Africa’s inclusion represents a major vote of confidence in the country, particularly with its credit rating placed under negative outlook by the big three global rating agencies.

Created in 1987, the WGBI includes 22 other sovereign markets including Australia, Canada, Germany and the United States. Many global bond funds are benchmarked against the WGBI, and South Africa’s inclusion could fuel demand for the country’s bonds from investors – commanding an estimated $2-trillion worth of funds – who track the index.

South Africa’s market value represents 0.45% of the market value of the World Government Bond Index in the October 2012 preliminary profile. It ranks seventeenth out of the 23 countries included by market weight.

The WGBI’s entry requirements are: a minimum market capitalization of US$50-billion, a domestic long term credit rating of A-/A3 by either S&P or Moody’s, and no barriers to entry.

“South Africa has been running a very tight fiscal ship for many years, and the decision is wonderful for the country,” Graham Smale, director of bonds and financial derivatives at the JSE, told Business Day when South Africa’s provisional inclusion was first announced in April.

South Africa’s National Treasury also welcomed the announcement, saying South Africa had and continued to enjoy strong capital flows into its bond market.

“These inflows have been a direct benefit of prudent fiscal and macro-economic policies that have helped to cushion South Africa against the worst effects of the global financial crisis,” the Treasury said in a statement.

SAinfo reporter