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South Africa Introduces R 1,000 Retail Bonds

Written by Humphrey Kebaya

Monday, 16 June 2008

These are exciting times in South Africa. The National Treasury of South Africa is floating two different types of RSA Retail Savings Bonds, the Fixed Rate Retail Savings Bonds and the Inflation Linked Retail Savings Bonds.

This is in line with its objective of cultivating a savings culture in South Africa. By removing hidden costs and supplying investors with very straightforward terms, the national treasury hopes that the minimum investment of R 1000 (around KES 10000), will pull in majority of South Africans currently out of the savings net. The country's Treasury has managed to attract investments to the tune of R2.3-billion through the Retail Savings Bonds since 2004.

Basically the Fixed Rate Retail Savings Bonds, first issued on May 2004, earn a market related fixed Interest Rate which depends on the Government Yield Curve and is payable on the Interest Payment Dates until the Maturity Date, while Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment, especially useful to savers in these high inflation times.

Phakamani Hadebe, the deputy director-general at national treasury, said bonds were better than other forms of open-market investments as they carried no commission, agency or service fees.

“It (Retail Savings Bond) offers competitive rates and allows investors to take control of their own savings portfolio instead of investing through a third party,” said Hadebe.

He is reported to have said that the Treasury would now be using Pick 'n' Pay in addition to the Post Office to sell the retail bonds in a bid to make them more widely available.

A recent Old Mutual study showed that an increasing amount of cash was being invested in residential property, stokvels and burial societies as opposed to bank accounts and unit trusts. The informal savings market in South Africa is estimated at R12-billion a year.

The benefits are obviously straightforward. First, the low minimum investment of R 1000 is just an investment marvel. This will attract majority of South Africans who would otherwise have not dared to participate in the bond market. The result effect is the deepening of the debt markets and increased market participants.

Secondly for the advanced investor Inflation Indexed bonds are currently the investor buzz. With high oil prices and the persistent inflation in the world economy, why not make money off a wave that would otherwise be detrimental to your hard earned savings.

The ingenuity of the South African government's move is in allowing even low income earners an opportunity to participate in the construction of their country, and to shield themselves from inflation. Government debt is often seen as a means by which the rich tax the poor, this scheme serves to diminish that net transfer, from the lower and middle classes to the wealthy (especially financial corporations). African governments need to design products that will capture the investing imagination of low income citizens. Will this be effective? Do the poor save? Can you say Equity Bank of Kenya?

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