We have identified a short term AAA rated Rabobank (RABOBK) bond denominated in South African rand maturing in March 2014, with a 7.05% yield for our clients.

Corporate Bond linked to the South African Rand

Netherlands based Rabobank has bonds, denominated in the South African rand, that currently has a yield over 7% for 29 months. The high yield and short maturity of this rand bond, when considered with its extremely strong AAA rating, compares very favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings, and we have sought the right opportunity for inclusion of the rand into our basket of foreign fixed income holdings.  We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against further erosion of the its buying power, and we view the recent strengthening of the dollar as a great opportunity to diversify into economies that continue to show good growth potential in spite of the recent financial turmoil.

US Debt Woes

As the US Treasury market remains unroiled by our politicians heightened brinkmanship, the European flight to safety continues to push T-bill yields down and drag the euro lower in spite of the looming deadline against default.  Today, Moody’s cut Ireland’s credit rating to junk status, and Italian bonds continued to be punished.  Evidently there is concern that, at least in other parts of the world, the piper (the financiers) will eventually have to be paid.  But for now, here in the United States of America, we dance.

Administration officials estimate they’ll need to raise the debt limit by $2.4 trillion to take them into the late winter or spring of 2013, when Republicans may control both chambers of Congress and perhaps the White House if Obama loses re-election.  Whether that can or should be correctly viewed as merely “kicking the can down the road” for another couple of years, no one seems to know, but the latest plan from Senate Republican leader Mitch McConnell calls for Congress to pass legislation authorizing Obama to “make successive requests to increase the debt limit.”  By any name, it’s one that’s sure to always raise a ruckus.

Meanwhile, while our debt temporarily becomes the sport of political jousting, the Swiss franc appears to have encroached on dollar’s formerly indisputable status as the world’s safe haven currency.  Perhaps the only European contagion that spreads to our US currency might be an increased association with “fiat.”  In our effort to diversify and protect our client’s assets against a possible further devaluation of the dollar and corresponding inflation threats, we here at Durig Capital scour the globe in search of sound investments in a basket of global currencies and it is why we have chosen Rabobank’s South African rand bond as This Week’s Best Bond.

South Africa Economy

South Africa is a middle-income, emerging market with a rich supply of natural resources; well-developed financial, legal, communications, energy, and transport sectors; a stock exchange that is the 18th largest in the world; and modern infrastructure supporting a relatively efficient distribution of goods to major urban centers throughout the region.  South Africa is the economic hub of Sub-Saharan Africa and is one of the world’s largest producers and exporters of gold and platinum.  The South African economy benefits from relatively good levels of trade freedom, business freedom, and financial freedom. The regulatory environment encourages competitiveness and flexibility. Continuing integration into global commerce has led to notable increases in productivity.

South Africa’s current government largely follows the same fiscally conservative economic policies of its predecessor, focusing on controlling inflation and attaining a budget surplus. Monetary stability is relatively good, but the government influences prices through regulation, state-owned enterprises, and other support programs by which more than a quarter of South Africa’s population currently receives social grants.  However, poverty is widespread, and much of the population is poorly educated and lacks access to infrastructure and services.  In the most recent year, total government expenditures, including consumption and transfer payments, held steady at 27.4 percent of GDP.

Growth was robust from 2004 to 2007 as South Africa reaped the benefits of macroeconomic stability and a global commodities boom, but began to slow in the second half of 2007 due to the electricity crisis and the subsequent global financial crisis’ impact on commodity prices and demand. At the end of 2007, South Africa began to experience an electricity crisis.  State power supplier Eskom encountered problems with aged plants, necessitating “load-shedding” cuts to residents and businesses in the major cities.  While inflation was high, averaging 8.2 percent between 2007 and 2009, it subsided to around 6 percent in 2010.  Existing labor regulations are not applied effectively, and the rigid labor market has contributed to persistently high (over 23%) unemployment rates.

South Africa’s financial sector accounts for about 20 percent of GDP, and consolidation has reduced the number of domestic banks to less than 40.  Capital markets are well developed and centered around the Johannesburg Securities Exchange, which is one of the world’s 20 largest in terms of market capitalization. Due to its limited exposure to the high-risk securities or the complex instruments that triggered the global financial turmoil, the overall banking system has not been severely affected by the crisis.  Reflecting a significant recovery from a real GDP of -1.7% in 2009 and 2.8% in 2010, South Africa’s economy is expected to grow at a rate of 3.6 percent this year, according to a report released by the SA Institute of International Affairs (SAIIA) last week, and GDP is expected to grow at a rate of 4.3 percent in 2012, according to the African Economic Outlook 2011 report.

China overtook the United States in 2009 to become Africa’s main trading partner.  It has also become the main destination for South African exports since the middle of 2009 and is the leading source of imports.  South Africa became a member of the BRICS – Brazil, Russia, India, China and South Africa – group last December.

Rabobank Group

Rabobank Group, established in 1898, is a Dutch based cooperative financial services provider.  It offers banking, asset management, leasing, and insurance and real estate services.  In the Netherlands they are a full-service market leader. Internationally, they are a leading food and agribusiness bank.  Overall, Rabobank Group has approximately 59,000 employees, who serve about 10 million customers in 48 countries, and it enjoys an award-winning sustainability rating in economic, environmental, and social categories.  In terms of tier 1 capital, it is among the world’s 25 largest financial institutions with over 34 billion euro’s and a 15.7% ratio to risk-weighted assets.  With a net profit of 2.772 billion in 2010, the return on equity stood at 8.6%.  Rabobank has received a triple A rating from both Moody’s and Standard & Poor’s since 1981, the highest ratings possible for banks, and is considered among the top 10 safest banks in the world.

Risks

The default risk is Rabobank’s ability to perform.  Given its underlying strength and AAA rating, as outlined above, it is our opinion that the default risk is minimal realtive to the currency risk of the South African rand.

The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to South Africa’s economy.

South Africa’s rand has gained nearly 20% against the dollar over the last two years, namely a result of its popular inclusion as a commodity based currency.  Daunting economic problems remain from the apartheid era, and the current government is facing growing pressures from special interest groups to use state-owned enterprises to deliver basic services to low-income areas and to increase job growth.  The government aims to increase farmland ownership by black South Africans to 30 percent by 2014, and its affirmative-action mandates threaten private property rights. Crime, HIV/AIDS, and high unemployment are ongoing concerns.  While acknowledging that every investment vehicle involves varying elements of risk, we believe that South Africa will continue to attract foreign investment dollars and that it represents an intelligent risk to reward choice and sensible portfolio diversification.

Allotments

How can investors participate in South African rand denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest.  So the answer to the question is simple – contact your Durig professional.

Conclusion

Even a modest US economic recovery plainly remains quite sensitive to other global events.  However, we believe that the persistent demand for South Africa’s abundant supply of resources from a global commodities boom will likely result in the continued expansion of their economy, and possibly even a strengthening of the rand currency.  Therefore, we view the currency risk of this prominent emerging market as a prudent opportunity that we have recommend our clients take in their continued effort to diversify away from overweighted US dollar based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

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South African Bond News:

• Bonds perk up, eye rand - Fin24
• Rand Slumps to Five-Month Low on Europe Debt Crisis, U.S. Data - Bloomberg
• Bonds track rand firmer - BusinessLIVE
• South African Markets - Factors to watch on May 18 - Reuters
• Bonds firm after switch auction - Fin24
• Bonds weaker as rand weighs - Fin24
• Bonds track rand weaker amid Greece woes - Business Day
• South African bond rush - Reuters Blogs (blog)
• Rand Falls First Day in Three on Weak Jobs Data - BusinessWeek
• Foreigners sold net R76.4m SA bonds Wednesday - BusinessLIVE
• More...

South African Economic News:

• South Africa: Economic growth uneven, slow, says Gordhan - 7thSpace Interactive (press release)
• South African Retailers at Most Expensive Headed for Fall - Bloomberg
• South Africa: BPS industry has potential for job growth - 7thSpace Interactive (press release)
• South Africa protesters hurl rocks at opposition march on youth subsidies ... - Washington Post
• Joel Netshitenzhe - Sustainable Development and the Green Economy in South Africa - AllAfrica.com
• Moody's Cites Concerns on South African Policy - Wall Street Journal
• Indian Ocean piracy impacting on the real economy - Creamer Media's Engineering News
• Is the Nation Set Up to Fail? - AllAfrica.com
• South Africa Shares: Anglo, BHP, AngloGold, Gold Fields, Sasol - Bloomberg
• IMF cuts sub-Saharan Africa 2012 growth forecasts - Orlando Sentinel
• More...

South African Currency News:

• South African Markets - Factors to watch on May 18 - Reuters
• South African Markets - Factors to watch on May 17 - Reuters
• AFRICA MONEY-S.Africa gives gold a break as it moots mine tax hikes - Reuters
• Presidential penis portrait riles S.Africa's ANC - CNBC.com
• South African Markets - Factors to watch on May 15 - Reuters
• Davies attacks the rand - Independent Online
• S.Africa 3mth T-Bill average yield slightly lower - Reuters Africa
• Global equity slams on brakes - Moneyweb.co.za
• SWAZILAND: IMF walks away from the kingdom - IRINnews.org
• S.Africa battles to keep blackouts at bay - Reuters
• More...

 

South African Rand (ZAR) in US Dollar (USD)

 


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