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SA lines up rare Eurobond as concern mounts over Eskom

SA is looking to offer securities with returns.

South Africa is back in the Eurobond market for the first time since May last year, looking to offer securities with returns that compensate investors for mounting fiscal woes.

The government is marketing 10- and 30-year dollar securities with yields of around 5.25% and 6.125% respectively, according to a person familiar with the transaction who asked not be identified because they are not authorised to speak about it.

Average yields on South Africa’s dollar bonds fell 163 basis points between the start of the year and early September to 4.7%, according to JPMorgan Chase & Co.’s indexes, amid a dovish turn by global central banks. But they have since climbed to 4.95% as concern mounts over the financial burden of state-companies such as Eskom.

“Over the last few weeks, South African external bonds have underperformed versus peers, so the cheapening up should raise sufficient interest to compensate for the increasing fiscal concerns,” said Trieu Pham, a strategist at ING Groep in London. “The initial price talk’s quite juicy versus the outstanding curve. It looks to me like 50 basis points cheap compared with pre-announcement levels.”

Yields on $2 billion of bonds due October 2028 rose two basis points to 4.64% by 1:38 pm in Johannesburg. They have risen by around 40 basis points since early September.

The government’s 2019 budget stipulated that it would raise the equivalent of $2 billion on international capital markets. A further $2 billion is outstanding from the 2018-19 fiscal year.

© 2019 Bloomberg L.P.

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We’re in a debt spiral already and taking on foreign denominated debt -10 and 30 years out – just looks like a total recipe for disaster.

The desperation levels must be intense.

Suppose instead that we printed money and used it to recpitalise Eskom. We redeem all local lenders to Eskom and wipe out this debt – yes, with printed money.

Question is, where would this money end up? Some would go offshore, some might go into the local stockmarket and boost share prices; very little, I submit would end up at shopping tills driving inflation – but even if it did it would be stimulatory.

But taking on dollar or euro demoninated debt to meet things like the govt payroll is like trying e-tolls to pay for the Gauteng highways. The least best option, and doomed to failure.

Disastrous even.

End of comments.

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