South Africa set to lift sovereign SLBs

IFR 2508 - 04 Nov 2023 - 10 Nov 2023
7 min read
EMEA, Emerging Markets
Julian Lewis

South Africa is planning to enter the ESG bond market with an ultra-rare sovereign sustainability-linked bond – potentially during 2024 – and is already working on an SLB framework, according to its debt chief.

“We will look to issue a sustainability-linked bond possibly in the next year,” said Terry Msomi, director of debt issuance and management at South Africa's National Treasury.

Rated Ba2/BB– (Moody’s/S&P), the country has opted for SLBs over use-of-proceeds alternatives such as green and sustainable bonds that have been adopted by its larger emerging markets peers India and Brazil, respectively. The former launched its green debut in January, while the latter is marketing its inaugural ESG deal.

“We’ve decided to go the SLB route as opposed to green bond or SB route due to the flexibility of the SLB framework with regards to use of proceeds and the reporting requirements,” Msomi said.

Market participants said this reflected the National Treasury's view that committing to specific use of proceeds curbs South Africa's sovereignty. Its high emissions intensity due to heavy reliance on coal for power generation would also make a green bond challenging.

Msomi did not disclose which key performance indicators or sustainability performance targets the sovereign plans to embed in its SLB framework. These will "probably" be established in the first quarter of the government's 2024/25 fiscal year, which begins in April, he said.

"In theory, an SLB structure could work if they could come up with credible and ambitious KPIs," said Viktor Szabo, an investment director at UK fund manager abrdn.

Progress on the US$8.5bn “Just Energy Transition Partnership” that South Africa agreed with the European Union, France, Germany, the UK and the US at the COP26 international climate summit in Glasgow in November 2021 could provide one source of KPIs/SPTs.

The partnership is supposed to accelerate the decarbonisation of South Africa’s electricity system by providing a mix of grants and concessional loans and guarantees.

But Szabo sees social KPIs as more feasible than environmental measures in view of the country's energy mix and European investors' sensitivity to potential greenwashing.

Rhys Petheram, a consultant and former head of environmental solutions at Jupiter Asset Management, would have liked the sovereign to offer a combined green bond and SLB. He stressed that any deal should factor in both the country's emissions targets under the Paris Agreement on climate change and the social requirements within the JETP.


South Africa would be only the third sovereign to issue the KPI-linked instrument following Chile and Uruguay – and only the second to move immediately to SLBs rather than issuing use-of-proceeds instruments first, as Chile did.

Banks and thinktanks have previously highlighted other emerging economies such as Brazil and Malaysia as candidates for sovereign SLB issuance, as well as Japan.

South Africa’s Sub-Saharan peer Ghana added the option to issue SLBs to its sustainable financing framework in 2021, though it has yet to make use of this.

Last month, quasi-sovereign Development Bank of Rwanda became the first issuer of an SLB from a low-income country eligible for concessional lending by the World Bank’s International Development Association.

South Africa would also be the most significant economy to endorse SLBs. Its gross domestic product of US$471bn in 2021, according to the World Bank, exceeds that of Chile and Uruguay combined, though its GDP per capita of US$7,000 in the same year is less than half of either of those countries.

South Africa plans to issue its SLBs in rand, though it may also list the instrument in London, according to Msomi. Chile recently pioneered local currency sovereign SLB issuance with offerings in quick succession in pesos and Unidades de Fomento, an inflation-linked unit of account.

Now a rare borrower in international debt markets, South Africa last issued internationally in April 2022 when it launched a US$3bn 10-year and 30-year Global bond. The two-trancher marked its first offshore deal in nearly three years.

Although Uruguay’s deal broke new ground by featuring a step-down coupon to reward it for meeting its targets, most SLBs – including Chile’s multiple offerings, which also feature US dollar and euro SLBs and mostly incorporate social as well as environmental KPIs – only feature step-up payments. These are to compensate investors if the issuer misses targets.

Msomi noted that South Africa would seek to avoid a step-up "for cash management purposes", but has not made a final decision on structure.

A National Treasury presentation notes that it is continuing to exchange maturing government bonds for long-dated debt. This reflects its higher budget deficit and medium-term borrowing requirement due to a weaker outlook. It is also taking concessional funding to meet foreign currency obligations.

The National Treasury held a global investor call on Wednesday organised by Goldman Sachs, HSBC and Standard Bank, followed by in-person meetings in Cape Town and Johannesburg.

The call focused on the sovereign’s assumption of energy utility Eskom’s liabilities and a potential similar deal for rail and port utility Transnet, as well as municipal financing.

Citing South Africa's macroeconomic challenges, including very low growth rates, one market participant called the SLB move "a long shot, more of desperation than commitment".

Another countered that SLBs' "policy lock" is attractive with sovereigns such as Sweden and the UK back-sliding on environmental commitments. "You can put the tests five years out to at least have coverage for the next electoral cycle. On the sovereign side that's very compelling."

Sukuk sale

South Africa is also preparing the way for another financing innovation. On November 22 the National Treasury will hold its first auction of rand-denominated sukuk, targeting R20bn (US$1.1bn) across five, seven, 10 and 12-year sharia-compliant certificates.

Each line will have a minimum size of R2bn.

With R60bn of trust assets to issue against, the National Treasury also reserves the right to increase the size of the auction “if pricing and volume supports”.

The deal aims to meet a “clear gap in the South African capital markets for sharia products with limited investment opportunities and significant available funds”, according to a National Treasury presentation.

BNP Paribas, Rand Merchant Bank and Standard Bank are joint lead arrangers, with Theza Capital and Africa Rising Capital as black economic empowerment partners to the latter two firms, respectively.

The sovereign previously issued US$500m of now-matured sukuk in the international market in 2014.