Brian Molefe, deputy director general, asset and
liability management at the South African
What has your borrowing strategy been this year?
This year we increased our presence in the foreign markets by issuing a benchmark $1bn 10 year bond. It is the largest issue from the African continent in a single tranche on the foreign markets. The bond fitted perfectly with our consolidated domestic and foreign maturity profile.
On the domestic market we have been buying back bonds worth R10bn in net buyback. It has caused a bit of a supply squeeze, which means that yields on South African government bonds actually rallied for the greater part of last year until November when we had the currency crisis.
But the supply squeeze did not happen in isolation. We were also switching bonds from illiquid to liquid instruments. We previously had in excess of 107 bonds out in issue, so we decided to switch these into liquid benchmarks. Today, we have about 13 outstanding bonds.
Of these, five are our benchmark bonds. We then have three further bonds that are inflation linked. The remaining ones are very small and illiquid and we cannot track down the investors. So now we do not have these small bonds all over the yield curve that are called bonds but are not actually bonds because they do not trade.
We also completed the yield curve on the inflation linked bonds. We now have three inflation linked bonds in our yield curve, maturing in 2007, 2013 and 2023, respectively. These are our preferred funding stock at the moment because we expect inflation to come down.
What was the biggest challenge in accessing the international capital markets this year?
Our biggest challenge has been that there has always been something happening elsewhere in the world. If nothing is happening now, then it is bound to happen very soon.
These matters, such as defaults by countries that are considered to be our peers, are very serious. It causes us concern, because we sometimes tend to be lumped with these countries.
Most of the time this happens out of ignorance, because the fundamental difference between us and most emerging market economies is that we have about 80% of our total sovereign debt in the domestic market.
Our domestic market is deep and well developed; we have a system of primary dealers; we have regular auctions on the domestic market and our yield curve extends to 25 years; and we have very sophisticated instruments, for example for switching bonds. We have done between 20 and 30 switches very successfully.
None of the things that we have been doing in our domestic markets are being done by other emerging market countries. This year we were invited to speak at the OECD conference on the use of derivatives by sovereigns because although it is not something we do at the moment, we are considering it.
If you compare us with Mexico or Argentina, all of Mexico's debt is indexed to the dollar, so it is effectively all foreign debt, and it does not extend beyond five years. Argentina has over 98% of its debt in the foreign markets.
If we decided not to go to the foreign markets, we would be able to finance our deficit on the domestic market. Annual turnover on the domestic market is about 50 times what we have outstanding in the market. That is a fundamental difference between South Africa and the rest of the emerging markets.
A lot of investors are beginning to make this distinction. Our biggest challenge has been to sell the South African story and emphasise this.
We have developed a risk management strategy that tells us the optimal foreign to domestic ratio of our debt as well as the optimal duration. We try to manage our debt towards these levels. The optimal level for foreign debt as a percentage of our total debt is at about 15%-20%.
Your $1bn 10 year bond was your first dollar benchmark in three years. Do you expect that you will leave it as long again before issuing in dollars?
Over the last few years we have issued the equivalent of $1bn each year. We leave the currencies and sizes as an operational matter. By this I mean that we look at any one point in time at what the opportunities are. We have traditionally issued in the dollar, euro and Samurai markets - we take whatever the best opportunity is. We are also dictated to by investor demand.
For example, this year April was the perfect time to do the deal that we did. We intended to do about $750m, but ended up doing $1bn because of demand. The timing was right, the markets were perfect, we had not been to the US for some time, there was demand for our paper and investors were happy with the pricing range. Going forward we will look for opportunities like that.
How and when do you plan to eliminate the net open forex position (NOFP)?
We plan to eliminate it in around 12-18 months. In 1998-1999, the NOFP was around R26bn. Today the NOFP is around R1.75bn, so it has come down dramatically.
There are two transactions that could put it to rest once and for all. If we do another $1bn equivalent in the foreign markets next year combined with the Telkom [South Africa] IPO, this should eliminate it.
But if after 12 or 18 months the NOFP has fallen to less than R1bn, then it will no longer be a serious issue anyway.
How troubling is the situation in Zimbabwe?
South Africa's GDP is more than 10 times that of Zimbabwe. Less than 5% of our exports go to Zimbabwe, and less than 2% of our imports come from there. So the prospect of contagion is not a real fear for the real economy.
We will continue to have the customers that we have around the world. The reasons that have caused recent FDI investments into South Africa are not going to change as a result of what happens in Zimbabwe. The issue here is more about sentiment, or misguided perception, than reality.
It is something that we need to constantly deal with, and point out that if we stick to business, there is nothing to worry about. This is a message that we always try to give to investors.
Investors are beginning to understand this more. The rand has been strengthening over the last couple of months. Our economy is actually growing beyond expectations, despite the fact that in the last 12 months the Zimbabwean government has been doing some drastic things.
The other fear was that some people thought that what was happening in Zimbabwe could happen in South Africa. But the government has demonstrated that the likelihood of that happening is very small. There are protection rights in the constitution, and the government has dealt decisively with the issue of illegal squatters.
One of the consequences of what has happened in Zimbabwe is that people have sobered up in South Africa and are increasingly dealing with these matters.
What about other investor concerns?
AIDS is another concern, especially government policy, as this is often confused with the president's stance. South Africa has one of the best AIDS policies in the world in terms of the rollout of the budget, distribution of condoms, primary health care and clinics.
Everybody agrees that if you improve the provision of primary healthcare you improve the incidence of AIDS, which thrives on the basis of untreated diseases.
The other concerns of those people who follow South Africa closely are economic growth and unemployment. These are the real issues. To create the number of jobs necessary to deal decisively with the unemployment problem, we need to grow at much higher levels than we are growing at the moment.
But the problem so far has been external rather than internal events. In 1997 the South African economy was growing at about 4%, but in 1998 it was affected by the Asian crisis. Because of our strong fundamentals, though, we never had negative growth and we were able to survive the Asian crisis with our heads above the water.
Our economic growth over the past five years has probably been the most stable in the world at between 1.5% and 2.5%. It has increased quite suddenly recently to over 3%, despite three interest rate cuts at the beginning of the year. It looks as if we are beginning to see the effects of prudent policies and strong fundamentals.
Another concern is that our domestic corporates are sitting on a lot of cash that they are not reinvesting into the economy. This is something that we will have to take up with them. It might be happening as a result of sentiment. Having had a closed economy for so long, and then suddenly being given the opportunity to go out, companies' natural instinct is to go out for a while, but then come back home.
What will your funding requirements be for next year?
We normally have a three year funding plan and there will be few changes from what it was this year. The one major difference will be in the domestic market, where instead of having a negative buyback, there will be a positive issuance of about R8bn.
This is because we had some quite large bonds that matured this year and also because we had this programme of switching domestic bonds.
Today we are at the point of maintaining our issuance levels. So we will do around R9bn on the domestic market and about R10bn on the foreign markets, which is again around the $1bn level. This is what we estimated in this year's budget but we are currently revising the figures and we have not yet reached a decision. If we do, we will announce it in next year's budget.
How do you think that next year's funding conditions will compare with this year's?
Our $1bn issue this year has elevated us to another level in the foreign markets. It came just after a Moody's upgrade and recently Fitch has improved our outlook. We expect Standard & Poor's to visit the country before the end of year, and I would not be surprised if an upgrade followed. With improving credit ratings, issuing conditions could be marginally better for us next year.