BESA’s latest performance report for Q1/2009 shows primary bond market growth during the period being driven entirely by the issuance of paper by state owned enterprises (SOEs). While minor increases in the listings of credit linked notes (CLNs) and dual/inward listings have been reported, these were too insignificant to offset relatively larger declines in issuance across other categories. By the end of March 2009, central government issuance had declined by 10%, bank issuance by 7%, securitisations by 10% and commercial paper (CP) by 18%.
However, while the picture appears grim in comparison to Q4/2008 performance, there were still some positive developments.
Monica Ambrosi, BESA’s Head of Research elaborates: “When reviewing the reporting period as a whole, growth in listings improved throughout the quarter, rising steadily to reach 8.6% year on year in March 2009 from 5.6% in December 2008. Both January and March recorded month-on-month growth which, when compared to a year earlier, was visibly stronger. February was however a little different, showing a contraction of 1.3% month-on-month. Broadly speaking, it is evident that the primary bond market is still depressed relative to H1/2008 and is being largely supported by government and SOE issuance.”
Ambrosi adds that it is likely these two categories will continue to drive growth in issuance during the remainder of 2009.
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Source: BESA
“It is estimated that SOEs will need to spend nearly R670 billion on infrastructure development over the next five years and it is likely that for the remainder of 2009 and 2010, such funding will be sought primarily from the domestic market. SOE issuance has gone from strength to strength over the past three quarters with average year-on-year issuance up 20.3% in Q1/2009, relative to average growth of 1.2% in Q2/2008”, she continues.
Corporate issuance however, paints a different picture with growth declining every month during Q1/2009 on the back of lower CP issuance, securitisations and bank issuance, contrasting developments during H2/2008 when corporates reflected a clear preference for CP issuance.
The pricing of debt has also undergone some visible changes in recent months, evident in the normalising of the benchmark yield curve in line with changes made to monetary and fiscal policy.
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Source: BESA
Ambrosi explains, “Monetary policy began easing in December 2008 and has continued during 2009. However, the fiscal and monetary stimuli expected from the Reserve Bank for the remainder of 2009 have forced a change in the long-term inflation outlook, leading to an increase in long-term yields making it more attractive to issue short-dated paper for the time being.”
When reviewing BESA’s secondary bond market, overall turnover in South African bonds contracted by 10% year-on-year during Q1/2009 with repo transactions remaining robust as a percentage of total turnover. Foreigners’ activity however moderated substantially during the period accounting for 23% of BESA’s turnover in March, down from 32% in September 2008. A decline in interest in South African bonds is also visible offshore, as is evident in the OTS data provided by Strate. Offshore transactions as a percentage of total turnover in South African bonds, declined from 20% in September 2008 to 14% in March 2009.
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Looking forward, Ambrosi concludes, “The declines reported for Q1/2009 are not entirely attributable to risk aversion which was the case at the end of 2008. Rather, they are partially driven by a reassessment of investment conditions globally across markets and a reallocation of investments. Whilst further monetary easing could continue to sustain bond turnover levels to some extent over coming months, activity on the local bond market is likely to slow during the second half of 2009 as short-term interest rates stabilise at a lower level.”
