South African government bonds has become the first African government bonds to be included in Citigroup’s influential World Government Bond Index. This development could boost investment inflows while reducing the cost of borrowing for the country.
The Citigroup World Government Bond Index is a market capitalization weighted bond index consisting of the government bond markets of multiple countries. Country eligibility is determined based upon market capitalization and investability criteria. The index includes all fixed-rate bonds with a remaining maturity of one year or longer and with amounts outstanding of at least the equivalent of US$25 million. Government securities typically exclude floating or variable rate bonds, US/Canadian savings bonds and private placements. It is not possible to invest directly in such an index.
South Africa’s inclusion represents a major vote of confidence in the country, particularly with its credit rating placed under negative outlook by the big three global rating agencies.
The US investment bank had earlier confirmed in June that the South African Government Bond Index would be included in its World Government Bond Index (WGBI), saying it had satisfied all three WGBI requirements of size, credit, and lack of barriers to entry.
“We are delighted to welcome South Africa into the WGBI,” Ernest Battifarano, Citigroup’s global head of index development and production, said in a statement last week.
“There are 12 South African government bonds in the index, with a market value of US$93.82-billion, and their appearance in the WGBI affords the opportunity to investors to gain exposure to this exciting market.”
South Africa’s market value represents 0.45% of the market value of the World Government Bond Index in the October 2012 preliminary profile. It ranks seventeenth out of the 23 countries included by market weight.
South Africa’s National Treasury also welcomed the announcement, saying South Africa had and continued to enjoy strong capital flows into its bond market.
“These inflows have been a direct benefit of prudent fiscal and macro-economic policies that have helped to cushion South Africa against the worst effects of the global financial crisis”, the Treasury said in a statement.