As the South African capital market remains relatively insulated from the financial woes of the developed nations, it is likely that there will be a significant uptick in foreign investment as investors seek out real returns.
This is according to Clinton van Loggerenberg, Director at ENS (Edward Nathan Sonnenbergs), who says that there is currently lots of opportunity for companies to bring their products into the South African market.
"Offshore investors are desperate to do something with their money, apart from keeping it in euros or dollars, where the returns are very low and the risks are increasingly high. Meanwhile, emerging markets offer the opportunity to get real returns. The South African market remains buoyant on the debt side - there is therefore cash available for investment and many companies are coming to the South African market and issuing bonds," he says.
According to van Loggerenberg, further interest in the local market is being generated as South Africa continues to be insulated from the financial crisis unfolding throughout Europe. "We are seeing lots of new issues and foreigners are definitely asking more questions about the possibility of bringing their offshore products to South Africa and listing them on the local market. People are recognising the potential opportunities in well-regulated emerging markets," he says. Furthermore, according to van Loggerenberg, South Africa has a highly regarded and mature debt capital market.
"The local market is very well established and, since 1997, has developed a good track record. In particular, the JSE has scored very highly in international rankings for its regulation which allows for seamless integration into the local market," he says. According to van Loggerenberg, the settlement systems used in South Africa are also well-regarded, further enticing foreign attention. "The documentation used in South Africa is based on European market standards and is therefore fairly familiar to many foreign investors who may be struggling to raise funds in their local markets," he says.
"This gives South Africa the competitive advantage in a sense. I think that, as long as the rand remains relatively stable, we will see a few issues that do very well in the near future. This will likely lead to further issues and will serve to refocus the spotlight on the opportunities in the South African capital market." He says that although the regulations facilitating inward listings of debt products have been in place for some time, offshore investors are only now seriously starting to look at the possibility of inward listing.
Van Loggerenberg says that in spite of the current opportunities in the market, South African banks are still at a disadvantage compared to their international counterparts when it comes to offering covered bonds. A covered bond is a bond that is secured by a security interest over specified assets on the balance sheet of the bank.
According to van Loggerenberg, covered bonds are very popular instruments used for liquidity management by banks offshore. "However, South African banks are not allowed to offer covered bonds which places them at a disadvantage to international competitors. Some market participants have expressed concern that holders of covered bonds enjoy a preference over depositors and unsecured bond holders, but it is in the interests of the markets that banks be encouraged to diversify their sources of funding. It may just be a question of setting appropriate limits on the percentage of assets over which a bank may offer security pursuant to a covered bond issue. I believe the time is ripe to reopen this discussion," he says.
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