Bond Exchange of South Africa Limited performance update - Q4/2008

The dislocation in global financial markets and conditions within the domestic economy during 2008, rendered the expansion of BESA’s primary bond market difficult during the year. Notwithstanding this, new bond listings on BESA reported annual growth of 5.6% on 2007, albeit the slowest growth rate recorded since 2002.

Monica Ambrosi, BESA’s Head of Research elaborates, “At the end of 2008, there were 1,102 bond listings on BESA by 100 various issuers, totaling R824 billion, with a market capitalisation of R935 billion. When reviewing annual primary listings, the bulk of growth (37%) is attributable to increased issuance of commercial paper by corporates and issuance by state owned enterprises (SOEs). Other key contributors were banks (21%) and government (20%). Overall however, the year’s listings growth was dampened by contractions in the securitisation and other corporate categories, as redemptions far outweighed issuance.”

When looking at these statistics for Q4/2008, total new listings grew by 5.8% year-on-year, down from an average of 6.4% during Q3/2008.

Ambrosi adds, “Listings growth during the final quarter of last year can be largely attributed to government issuance (38%) and issuance by SOEs (18%). Average annual growth in SOE issuance picked up from 5% during the first half of the year to 14% during the second half of 2008 and although government issuance also accelerated in the second half of the year, the increase was not as pronounced as that of SOEs.”

She also makes note of the following listings activity during Q4/2008:
*City of Johannesburg raised R900 million in early December.
*Transnet was the most active SOE borrower during Q4/2008. Through taps on existing issues, new issues and commercial paper, the parastatal obtained R2.6 billion worth of funding during the quarter.Airports Company of South Africa (ACSA) and Eskom were less active, each raising R1.5 billion and R250 million respectively.
* National Roads Agency raised R1 billion.

During Q4/2008 there were contractions in issuance by banks and securitisations. The annual decline in securitisations, first recorded in September, gained momentum during the last quarter eventually recording a year-on-year contraction of 15% at the end of December. Issuance by corporates remained characterised by a preference for short-term borrowing via commercial paper, following the widespread negative sentiment permeating global debt markets. Nonetheless, there was some expansion in issuance by “other” corporates, any corporate other than a bank or securitisation special purpose vehicle.

Ambrosi continues, “The yield curve flattened considerably and also shifted sharply lower during Q4/2008. A substantial decline in commodity prices, coupled with a rapid slowdown in global economic activity prompted a review of the outlook for domestic inflation. Furthermore, a number of economic indicators began to signal some distress in the domestic economy prompting the Reserve Bank to cut interest rates by 50 basis points in December. Expectations of the rate cut saw the spread between the R153 and the R186 narrow from 130 basis points on 24 October to -0.09 by 8 December and as at 13 January 2009, the spread was still marginally negative.”

The chaos experienced on global financial markets in September persisted through to the end of the year, resulting in heightened levels of uncertainty and general risk aversion. Investors fled from stock markets that were falling precipitously on the back of large-scale company failures and write-offs in the financial sector and sought the safe haven of US Treasuries and other government bonds. As a result, bond yields fell to historically low levels.

Foreign investors shunned domestic bonds opting to exit from all markets perceived to be more risky. In general, foreigners’ interest in South African bonds declined during Q4/2008. After peaking at 46% in September, foreigners’ purchases and sales of bonds (both on BESA and OTS) as a proportion of total bonds traded, declined to 34% in November and ended the year at 35%.

In USD terms, turnover on BESA increased by 18.2% to $2.3 trillion. Whilst this was not the most aggressive growth rate recorded among the world’s major exchanges, it did result in BESA remaining the fourth largest exchange in terms of the turnover recorded for bond trades in 2008, amongst those exchanges monitored by the World Federation of Exchanges.

Looking ahead to performance in 2009, Ambrosi concludes, “In 2009, bond turnover volumes on BESA are expected to moderate slightly relative to 2008 as the world’s economy remains in a lull. However, additional upsets in financial markets and perhaps further reports of substantial investment losses by major financial and even other institutions cannot be ruled out. Domestically, lower interest rates appear certain as the Reserve Bank monitors the gradual moderation in inflation whilst grappling with increasing signs of slower economic growth. The outlook for the bond market will thus be closely linked to the recovery in the real economy and domestic stock market.”