In a bid to address a fiscal shortfall of $2.6 billion for the current fiscal year, South Africa conducted its second Islamic bond sale on Wednesday, marking a pivotal move as the government accelerates efforts to secure funding. The auction, which witnessed robust investor interest, saw total orders reaching 35.5 billion rand ($1.9 billion), with 20.4 billion rand of debt issued across four tenors, according to the National Treasury.
This sale follows South Africa’s previous sukuk issuance in 2014, which was denominated in dollars. Notably, Wednesday’s auction was the first to be conducted in the local currency, reflecting the nation’s commitment to diversifying its borrowing instruments.
Farzana Bayat, a fixed-income portfolio manager at Foord Asset Management in Cape Town, noted the strong subscription to the auction, with a significant portion of the debt allocated to the 5.3-year and 7.3-year tenors. The bonds were taken up at levels approximately 20 to 30 basis points above the Treasury’s price guidance, indicating a highly favorable outcome, she commented. Bonds with maturities of 10.3 years and 12.3 years were also successfully sold.
South Africa, as Africa’s most industrialized economy, has faced challenges in international debt markets since April 2022, primarily due to elevated global interest rates that have rendered the cost of foreign debt prohibitive. While a dollar-denominated sukuk issued in 2014 attracted non-resident investors, the latest sale is believed to be dominated by local buyers.
Farzana Bayat highlighted the uncertainty surrounding offshore market appetite for a rand-denominated sukuk. She noted that if foreign investors were to purchase a rand sukuk and hedge against currency risk, the net dollar yield might not be as appealing.
The initial pricing guidance for the sukuk varied across different tenors, with the 5.3-year tenor priced at 9.6%, the 7.3-year at 10.45%, the 10.3-year at 11.25%, and the 12.3-year at 11.65%, according to a term sheet seen by Bloomberg. The final yield for the 10.3-year tenor was set at 11.58%, reflecting the successful execution of the auction amid prevailing market conditions.
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27th November, 2023
Delino Gayweh
Serrari Financial Analyst
