South Africa turns to Islamic investors to plug budget gap

South Africa’s debut sale of Islamic bonds had investors clamoring for four times the amount offered. The government is hoping for more of the same as it returns to the market to help plug a budget shortfall of more than $4 billion.

Africa’s most-industrialized nation is considering a rand-denominated sukuk (Islamic bonds) in the fiscal year starting 1 April , after becoming the first African nation to issue a sovereign Shariah-compliant bond when it sold $500 million of securities in 2014.

The rand sukuk would also set a benchmark for local corporate issuers to tap the market, according to the National Treasury.

“There is very strong interest, particularly from Islamic asset managers as well as Islamic banks,” Tshepiso Moahloli, the chief director of liability management at National Treasury, said by email.

“There is a strong market-development element with this decision, which is broader than just funding.”

South Africa is increasing issuance in domestic and foreign markets to help meet 197 billion rand ($16.5 billion) of bond redemptions over the next three years and plug a stubbornly high budget deficit.

In addition to introducing local-currency sukuk, it plans to raise $3 billion in international markets over the next financial year starting April 1, up from $2.5 billion this year.

South Africa’s dollar Islamic bond was priced to yield 3.9%. The securities yielded 3.57% on Monday, on par with similar-maturity dollar bonds. Since South Africa tested the market, Nigeria and Kenya have also sold sovereign dollar-denominated sukuk.

While much of the uptake for the Islamic bonds is expected to be from foreign investors, there is local appetite for Islamic investments too. South Africa has a sizable minority Muslim population.

“There are Shariah-compliant local and offshore funds looking to invest in sukuk with a good credit rating,” Asief Mohamed, the chief investment officer at Aeon Investment Management Ltd. in Cape Town,” said by phone.

South Africa’s local-currency debt is rated Baa3 at Moody’s Investors Service, the lowest investment level.

“The Treasury said by email that the amount of sukuk issuance would “depend on market interest and timing.”

Read: Trouble as state companies flat out ignore budget rules and restrictions

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South Africa turns to Islamic investors to plug budget gap