UPDATE 1-Bond index move could steer up to $9 billion to S.Africa

Tue Apr 17, 2012 9:54am EDT

By Xola Potelwa

JOHANNESBURG, April 17 (Reuters) - The prospect of billions of dollars in new investment money pouring into South Africa sent the country's bonds sharply higher on Tuesday after investment bank Citi said they were on track to be included in its main global bond index.

Such a move would broaden South Africa's international investor base and trigger huge amounts of purchases - as much as $9 billion by one estimate - from overseas pension funds and others that track bond indexes.

Yields on the benchmark 2026 issue fell sharply as investors bought the bond and the rand currency erased losses to trade up 1.5 percent against the dollar.

"Around $1.5 to $2 trillion is believed to track the index," said Peter Attard Montalto, an emerging markets economist at Nomura International in London.

"South Africa would have a weight of around 0.43 percent and that would mean there would need to be around $9 billion of South African government bond-buying by index trackers. That equates to 8.9 percent of the total outstanding - huge."

Citi said South Africa was currently in a three-month "monitoring period" to make sure it continued to meet index entry requirements to its World Government Bond Index (WGBI). These are based on issue size, ease of entry and credit rating, all of which were passed in April.

"If South Africa continues to meet all WGBI criteria with the May and June 2012 profiles, it will become the first African government bond market to be included," it said in a statement.

Inclusion in the index would be a huge boost for the government after all three major ratings agencies cut the outlook on their credit ratings over the past six months.

The WGBI currently has 22 countries, with Malaysia, Poland and Mexico the only emerging markets included.

Pretoria applauded Citi's announcement as an endorsement of its long-term spending plans in the face of rating agency concerns, and said the extra cash pulled into the economy could ultimately filter through into the stock market.

"It is positive for our own borrowing costs and could mean in the medium-to-long term we could see further foreign capital inflows and to a degree it could have a positive spin-off into equity markets," said Monale Ratsoma, head of liability management at the Treasury.

Citi sub-Sahara strategist Leon Myburgh said he expected inflows of $5-$7.5 billion, compared with a total market size of $88 billion.

"The big thing about it is it will add a new investor base into South Africa," he said.

A final announcement is expected at the end of June, and South Africa's formal inclusion would then commence in October, Citi said.

The yield on South Africa's 2016 bond fell 28 basis points - its biggest daily fall since October 2009 - to 8.13 percent, the lowest in more than two months.

The rand was trading at a 10-day high of 7.8265 against the dollar.

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