SA hires Citigroup for first dollar bond in two years

London - South Africa may tap international capital markets for the first time in almost two years to finance a widening budget deficit after a bond rally reduced borrowing costs.

The government picked Citigroup Inc, Rand Merchant Bank and Standard Bank Group Ltd. as joint lead managers and Investec Bank as a co-manager for a call with investors on April 6, according to a person with knowledge of the plan, who isn’t authorised to speak publicly and asked not to be identified.

Africa’s most-industrialised country may choose to sell a benchmark-sized dollar bond due in 2026, the person said.

South Africa’s financing needs have become pronounced as its budget deficit swelled to an average of about 4% of gross domestic product in the past four years, one of the factors cited by Moody’s Investors Service in its decision last month to place the country’s investment-grade rating on review for a reduction. The nation, which last sold dollar debt in July 2014, included plans in the budget announced in February to raise $1 billion abroad.

“This would be good timing in my view,” said Kevin Daly, a money manager at Aberdeen Asset Management in London who helps oversee $10 billion in emerging-market debt. “Yields are generally very low and you have decent market demand.”

Lower Costs

The premium investors demand to hold South African dollar debt rather than Treasuries has narrowed 145 basis points since touching a seven-year high on Jan. 20 to 380 basis points, according to JPMorgan Chase & Co. indexes. In that period, yields on South Africa dollar bonds due in September 2025 fell more than 127 basis points to 4.72% by 13:52 in Johannesburg.

"It’s going to depend on the market conditions," Lungisa Zuzile, the director-general of South Africa’s National Treasury, said in Cape Town on Wednesday on the prospects for a Eurobond sale. "If the market is right, in other words we think we will get a good coupon, we will do it.”

Finance Minister Pravin Gordhan traveled to the UK and US from March 7-11 to meet investors for a so-called non-deal roadshow.

Investor confidence in South Africa has been undermined by President Jacob Zuma’s shock firing of his finance minister in December, followed by a court ruling last week that he violated the constitution by refusing to pay taxpayer money spent on his private residence. Zuma escaped impeachment following a parliamentary meeting on Tuesday, contributing to a selloff that sent the rand down the most in emerging markets today.

A downgrade of the Moody’s Baa2 rating would move South Africa to one level above junk and on par with that of Standard & Poor’s, which has a negative outlook and is reviewing the score in June, and Fitch Ratings Ltd.

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