Treasury-plus

South Africa's government has made impressive strides in building the country's economy since coming to power in 1994. In its 2007/08 budget, the National Treasury projected the country's first surplus in recent memory, at 0.6% of gross domestic product (GDP), a far cry from the deficit it inherited from the former apartheid regime.

For the Treasury, these changed circumstances have given rise to a different set of priorities. "The budget surplus has led to new thinking on the role of debt management," says Anthony Julies, Pretoria-based head of risk management in the National Treasury's asset and liability management division.

Specifically, the Treasury's preoccupation is no longer with financing a budget deficit, but rather on optimising its debt portfolio while addressing broader macroeconomic concerns. As such, it has no plans to issue new bonds for the remainder of the fiscal year. "We are not increasing our outstanding debt, but we are actively managing it," Julies attests.

Unlike some other sovereign risk managers, the National Treasury does not use swaps to alter its risk profile. Instead, it actively manages its liabilities via strategic issuance, bond buybacks and switching operations.

One of its most important considerations at present is the country's growing balance of payments deficit. In the third quarter of 2007, oil price inflation helped push this to 8.1% of GDP, according to the South African Reserve Bank. Julies says the Treasury has been offsetting the deficit by lowering its foreign debt, primarily through buybacks, as well as switching short-term domestic debt into longer-term domestic debt.

Since February 2007, this strategy has reduced the Treasury's foreign cabilities by some $217.6 million. Despite this reduction, Julies stresses the group remains aware of the need to maintain its involvement in international markets: "We are not withdrawing from the international market completely. It's very important we retain a regular interaction with foreign investors."

Through switching short-term domestic debt into longer-term issues, the Treasury is also smoothing the maturity profile of its liabilities - reducing its liquidity and refinancing risk. During January, R4 billion in short-term inflation-linked bonds were successfully exchanged for medium- to long-term index-linked issues.

However, not all the Treasury's planned exchanges have gone unhindered. On January 28, it conducted an auction aimed at switching a minimum amount of R7 billion from its 10% fixed-rate bond, due in February 2008. The voluntary auction offered three existing issues as alternatives, but investors expressed little interest in the idea of switching to the other bonds and none were subsequently allotted - a setback Julies blames on market volatility. Despite this, such switching operations will continue, he says.

The Treasury's optimal portfolio consists of no greater than 20-25% in foreign debt, and a 70/30 balance between domestic fixed- and floating-rate liabilities. As of December, its foreign debt constituted 13.6% of its portfolio and it had an 75/25 split between domestic fixed- and floating-rate liabilities.

It is intent on diversifying its portfolio further, says Julies. Since 2004, the Treasury has been an active issuer of bonds aimed at the country's retail investors. It now has two series of retail bonds on issue, including fixed-rate bonds with maturities of two, three and five years, and inflation-linked bonds with maturities of three, five and 10 years.

"Although we do use it as a funding instrument, it's also an objective of government to encourage saving in the country," remarks Julies. While the Treasury undoubtedly obtains funding diversification from retail bonds, its wider goal is to encourage savings - and to coax other public and private sector bodies into similar issues.This has had some success. With Treasury assistance, the City of Johannesburg became the country's first municipality to issue retail bonds in September 2007 (Risk South Africa Spring 2007, page 26).1 Standard Bank has also issued its own series of bonds for the retail market.

At a more general level, Julies claims, by gradually decreasing the volume of its outstanding issues in the capital markets, space will be created for other entities to issue too. By January 2008, the government's R431 billion in listed domestic debt consisted of 55.2% of the total on the Bond Exchange of South Africa. With the budget surplus and gargantuan infrastructure spending planned by the country's corporates and state-owned entities over the next few years, the expectation is that this may decline. "By decreasing our overall level of issuance, we hope capacity will be created for others to enter the market," says Julies.