Bond issuance likely to stay sluggish

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Johannesburg - The country’s worst corporate bond market in five years risks continuing as concern about the effect of rising interest rates on growth amid mining strikes and power shortages weighs on sentiment.

Corporate debt issuance excluding banks slumped 42 percent to $745 million (R7.8 billion) in the first four months of the year, the worst performance since the same period in 2009, according to data compiled by Bloomberg. Comparable company bond sales in Poland more than doubled in the period, figures on Bloomberg and from Fitch Ratings show.

While the rand has rebounded 8 percent since the central bank raised interest rates on January 29, growth this year is forecast to be just a little more than a third of the 7 percent the government says is needed to bring down the official unemployment rate from almost a quarter of the workforce.

South African companies are curtailed by a constrained power supply and a three-month work stoppage at the world’s largest platinum producers. Metal shipments make up more than half of the nation’s exports.

“If you’re a corporate you’ve already got quite a lot going against you,” Gina Schoeman, an economist at Citigroup in Johannesburg, said.

“Corporates are still not sure what the next nine months are going to hand them as far as tighter monetary policy goes.”

Non-banking issuance has been dominated by Daimler’s South African Mercedes-Benz unit and power utility Eskom Holdings, which produces 95 percent of the country’s electricity. Eskom is spending R500bn up until 2017 to add capacity of almost 11 000 megawatts to the national grid and to refurbish ageing plants.

The rand has slid 0.1 percent against the dollar this year, following a 19 percent plunge last year – the worst among 16 major currencies tracked by Bloomberg. On Friday the local currency was bid at R10.4654 to the dollar, a gain of 1.75c from the same time on Thursday.

A rand weakened by a widening current account deficit prompted the Reserve Bank’s unexpected interest rate increase.

This may have contributed to curbing issuance, according to Bronwyn Blood, who helps to manage bonds at Cape Town-based Cadiz Asset Management.

Bond sales might pick up because the need for South African banks to meet Basel III capital adequacy ratio rules would make it more expensive for companies to borrow from lenders, Blood said.

Loans were “a costlier and less flexible source of funding than the corporate bond market”, she said.

A strike by the Association of Mineworkers and Construction Union on the platinum belt had cost platinum producers about R15.3bn in lost revenue, they have said.

The government is forecasting economic growth of 2.7 percent this year compared with 1.9 percent last year.

“Issuers are likely playing a wait-and-see game at the moment, waiting for economic growth to kick in before they take their plunge,” Jason Lightfoot, who helps oversee investment at Futuregrowth Asset Management, said from Cape Town.

“There has been very subdued issuance.” – Bloomberg


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