February 10, 2004

By Vernon Wessels

Johannesburg - The government would issue on May 24 a retail bond aimed at the small investor, Johan Krynauw, the chairman of the national treasury's retail bond team, said yesterday.

"The government hopes to finance between 5 percent and 10 percent of its deficit in the next three years through the issue of the retail bonds," Krynauw said.

The deficit is expected to measure R44 billion in 2006/07, according to the medium-term budget policy statement issued late last year, which means the retail bond issue, South Africa's first, could be as much as R4.4 billion.

The government borrows money on the market by selling bonds, which constitute a promise to pay back the money with interest.

Small investors will be able to invest anything from R1 000 to a R1 million in the bond, to be aimed at earners wanting to save.

The bond market is currently only open to investors with more than R1 million.

Every six months the bond, to be issued over two, three or five years, will pay a market-related interest rate on the investment.

It will be a non-marketable instrument, meaning holders of the certificates will not be able to access their capital until the first year after the investment has lapsed. 

"People wanting to buy the bonds will be able to apply through the internet, post office or directly by application forms from the national treasury," Krynauw said.

An aggressive marketing campaign would be rolled out in the next two to three weeks, he added. "The main objective is to encourage people to save.

"It will also mean the government has a more diverse portfolio and allows us to tap into another pool of funding," Krynauw said.

Chris Clarkson, the head of debt markets at Andisa Capital, said the only disadvantage of a retail bond was that an investor could potentially be buying at the bottom of the cycle because of historically low interest rates and inflation.

The advantage, however, was that it allowed the small investor to diversify a portfolio of equities, a unit trust, money market fund or property.

Government debt was highly rated, making it a safe investment, while dividend yields on a bond might be better than those available from equities at the moment, Clarkson said.