South Africa included in Citi bond index

18 June 2012

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

The US investment bank first announced in April that the South African Government Bond Index had become eligible for inclusion in its World Government Bond Index (WGBI), saying its April 2012 profile had satisfied all three WGBI requirements of size, credit, and lack of barriers to entry.

Last week, Citigroup said South Africa had now satisfied the WGBI criteria for three months running, and would therefore be included in the index from October.

Major vote of confidence

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

Created in 1987, the WGBI currently comprises 22 countries 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 who track the index.

South Africa’s inclusion will be “a big milestone for the WGBI as we continue to diversify our coverage,” Ernest Battifarano, Citigroup’s global head of index development and production, said in April. “Investors who have not previously considered South Africa may tap into this exciting and developing market.”

The Mail & Guardian reported recently that there was “strong and growing demand from international investors for bonds in South Africa, with some analysts even seeing it as a relatively safe haven during the eurozone’s debt crisis.

“South Africa’s market is liquid, offers an established yield curve and high returns, traders say, with the added attraction of being promoted into a major bond index recently,” the Mail & Guardian reported.

“The 20-year benchmark bond is now offering an 8.8% yield compared to its Mexico counterpart at 7%.”

SA ‘running a tight fiscal ship’

There are currently 11 South African government bonds that will be included in the WGBI. With a market value of $83.0 billion, these will represent a pro forma market weight of 0.41 percent in the WGBI.

This weighting compares well with other emerging markets on the WGBI, with Malaysia’s standing at 0.37% in April, Finland’s at 0.45%, Ireland’s at 0.51%, Poland’s at 0.55% and Mexico’s at 0.64%.

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.

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