BRICS bank sells rand-denominated bonds for first time

The Shanghai-based New Development Bank (NDB), which was formed by BRICS countries in 2014, has conducted its first sale of bonds denominated in South African rand as emerging markets seek greater access to local currency funding.

Last week, the NDB issued both a R1bn ($53.1m) five-year bond and a R500m three-year note, with Reuters reporting the auction attracted R2.67bn of bids. Dilma Rousseff, the former president of Brazil who now chairs the NDB, has said the development bank expects to lend up to $10bn this year to member countries – with about 30% of funds lent in local currencies.

The increased focus on local currency lending comes at a time when BRICS countries are exploring ways to reduce their dependence on the US dollar and the US-dominated financial system more broadly. According to the deputy president of South Africa, Paul Mashatile, this will be a key topic of discussion at the BRICS Summit, which starts today in Johannesburg.

Significant development

Kumeshen Naidoo, head of debt capital markets at Absa Group in Johannesburg, tells African Business that the NDB’s rand bond offerings are a significant development because they could help lessen South Africa’s dependence on international capital markets, which are often seen as particularly volatile.

“The NDB already has a portfolio of rand assets – they have lent rand for South African social and infrastructure projects before – but they managed to fund that through the international swap and basis markets,” he says.

“This means they had to convert dollar funding that they raised through their eurobond sales into rand. In the long-run, the cost of that financing is dependent on the volatility of these capital markets – and international swap markets can be quite volatile,” he adds. 

Naidoo believes the bond sales demonstrate that the NDB now has access “to a more sustainable, more domestic source of rand funding.”

Driving up quality across the board

Naidoo also notes that this move could have the effect of boosting the development and sophistication of capital market infrastructure in South Africa, which has arguably declined in recent years owing to South Africa’s worsening domestic economy.

“Similar types of entities [to the NDB] have issued bonds in South Africa before but those transactions have now matured – it’s now been a long time since the likes of the International Finance Corporation (IFC), for example, have accessed the rand markets, says Naidoo.

“What we’ve seen in the South African markets, certainly over the last three or four years, as the South African macroeconomic situation has deteriorated somewhat, is that South African issuers either have had no need for financing or have simply rolled their exposure.

“As a result, some of the larger issuers that used to be active in the South African market either decreased their number of issuances or delisted programmes completely.”

However, he is confident that having a new issuer in the form of the NDB could help stimulate greater activity in South African capital markets.

This is particularly because the NDB’s credit rating is significantly higher than has become the norm in South African markets. The entry of higher quality bonds into South Africa could help drive up quality across the board, Naidoo suggests. “The NDB’s credit is of the highest quality from a global ratings’ perspective. It has AA+ from S&P and AA from Fitch – ten notches above South African sovereign bonds.”

“It’s a really high-quality credit issuer, and will really set the benchmark, not just in terms of pricing, but certainly in terms of process,” Naidoo says, which could help drive greater interest in the South African market from other international organisations.

“Since the NDB announcement, we’ve already received quite a few inbounds from similar entities asking for more guidance around process and information on how the NDB transaction worked,” Naidoo tells African Business.

“We think off the back of this, we will see more entities accessing South African debt capital markets – which will be great for investors, ensure a more sustainable source of rand funding for projects in South Africa, and overall will bring broader benefits for the South African people.”