The Shanghai-based New Development Bank (NDB), formed by BRICS countries in 2014, has conducted its first sale of bonds denominated in South African currency Rand, amid the background of emerging markets seeking greater access to local currency funding.
In August 2023, the NDB reportedly issued both R1 billion (USD 53.1 million) five-year bond and R500 million three-year note, as the auction attracted R2.67 billion in bids.
Former Brazil President Dilma Rousseff, who now chairs the NDB, informed the media that the bank was expecting to lend up to USD 10 billion by 2023-end to member countries, with about 30% of funds being lent in local currencies.
These developments come amid the BRICS countries looking at ways to reduce their dependence on the US dollar and the US-dominated financial system.
Kumeshen Naidoo, head of debt capital markets at Absa Group in Johannesburg, told African Business that the NDB’s rand bond offerings were a significant development as the move could help lessen South Africa’s dependence on volatile international capital markets.
“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,” the official said.
“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 added further, while stating that the bond sales demonstrated that the NDB now has access “to a more sustainable, more domestic source of rand funding.”
He also observed that these rand bond offerings could boost the development and sophistication of South Africa’s capital market infrastructure in the long run, which has reportedly declined in recent years due to the nation’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,” remarked 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,” he noted further.
“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,” the official explained, while expressing confidence that having a new issuer in the form of the New Development Bank could help stimulate greater activity in South African capital markets.
NDB’s credit rating is reportedly significantly higher (AA+ from S&P and AA from Fitch) in South African markets and Naidoo believed that the entry of higher quality bonds into the country could help “drive up quality across the board”.
“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,” he said, while adding that the NDB move could help drive greater interest in the South African market from international organisations in general.
“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 told 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,” he concluded.