The country has had a tough year economically. The South African economy was hard-hit by an extended platinum mine worker strike in the first half of 2014, which was followed by further labour unrest in the gold and metal sectors. Its currency has stormed past R11.00 to the dollar, and there seems little chance of a recovery in the last few months of the year.
The wider economic impact of the strikes, as well as further pressure on consumers across the country, had economists warning of a possible recession.
The argument for non-Islamic sovereigns issuing sukuk, which are a difficult and laborious type of trade to structure, is typically built on two main pillars.
Firstly, that eventually the diversification of funding will bring down yields on a country’s conventional paper. Secondly, that printing sukuk helps tighten ties to the Middle East and the world of Islamic finance — the UK and Luxembourg both said that this second rationale was the main goal in their sukuk plans.
But lowering average funding costs via the use of sukuk is a long game. Turkey paid 25bp over its conventional curve for its most recent sukuk and South Africa is expected to be priced similarly. Even Indonesia — after five years of regular sukuk sales — has only cut its sukuk premium to 15bp-30bp. Sukuk is a format that should be used by issuers that can pay that extra without too much hand wringing, or that can price sukuk flat to the conventional curve. South Africa is in neither camp, and nor has it run out of demand for its conventional paper.
Neither has the sovereign shown a strong desire to become a hub of Islamic financing. The UK has several Islamic banks and the London Stock Exchange boasts a bevy of listed sukuk. Hong Kong has Malaysia — the sukuk market’s most prolific country — on its doorstep. South Africa has no strong links to the Islamic world, which itself raises questions for Islamic accounts considering buying this debt. While the documentation may be Shariah compliant, it is difficult to think of South Africa as chiming in perfect harmony with the growth of that market, as the UK does for example with its six Islamic banks.
While the Islamic investor base is undoubtedly keen to geographically diversify their holdings, some market participants have questioned whether Islamic investors should be buying paper of an issuer with such weak connections to Islam, as they have questioned the sukuk plans of Goldman Sachs and Russia.
South Africa should be applauded for the sophisticated spirit in which it has approached the capital markets, but it seems a strange time and place for sukuk.