Developing local currency bond markets for long-term development financing in Sub-Saharan Africa

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. This article discusses the role that local currency bond markets (LCBMs) can play in the longterm financing of sustainable development of Sub-Saharan African (SSA) economies, and presents an empirical analysis of the factors which may hinder or promote the development of such markets in SSA. Using a new dataset for 27 SSA countries, our findings support earlier research on SSA and other regions, showing that LCBM development is related to country size, larger banking systems, greater trade openness and better regulatory frameworks, and the rule of law. Foreign investor participation broadens the investor base and can give a boost to LCBM development, yet it may also increase volatility of international capital flows. Hence, with a view to the experience of emerging economies in other regions, capital market liberalization should be pursued only very cautiously and in step with solid financial and institutional development. Permanent

Macroeconomic determinants of sovereign bond market development in African emerging economies

“…Additionally, and in corroboration with Berensmann et al (2015), the relative size of sovereign markets is least in low-income economies and biggest in upper-income economies. The negative estimate in the entire and SSA samples concur with Mu et al (2013) and may indicate that more developed economies rely less on their bond markets for funding as their economies facilitate more options for government funding.…”

Localising sovereign debt: The rise of local currency bond markets in sub‐Saharan Africa

“…Also, other than by taking 1-year lags, we do not address possible endogeneity problems, due to the difficulty of finding good instruments. Our results should hence not be interpreted as demonstrating causality, a caveat that also applies to earlier studies of LCBM development in SSA (Berensmann et al, 2015;Essers et al, 2016;Mu et al, 2013) and other regions (Bhattacharyay, 2013;Burger & Warnock, 2006;Claessens, Klingebiel, & Schmukler, 2007;Eichengreen, Panizza, & Borensztein, 2008). Nonetheless, we believe the econometric analysis that follows contributes to our understanding of SSA LCBMs and helps to lay the groundwork for better identification of causal relations as wider samples and longer time series become available.…”

“…Our paper contributes to the understanding of SSA LCBM development, first of all, by extending prior studies on LCBM capitalisation (Adelegan & Radzewicz‐Bak, ; Berensmann, Dafe, & Volz, ; Essers, Blommestein, Cassimon, & Ibarlucea Flores, ; Mu, Phelps, & Stotsky, ) with an inquiry into the covariates of LCB tenors and issue yields and, second, by considering a wider range of financial development measures as explanatory variables. Our panel regressions indicate that a well‐developed financial sector and higher‐quality political institutions relate positively to both LCBM capitalisation and average LCB tenors, the latter hinting at the importance of public accountability for longer‐term investment.…”

“…For our explanatory variables in vector X i,tÀ1 , we start with a selection of regressors that appear in the prior work of Berensmann et al (2015), Essers et al (2016) and Mu et al (2013). Log GDP and log GDP per capita are included as proxies of economic size and economic development, which we expect to be positively related with LCBM capitalisation and LCB tenors, and negatively with average issue yields.…”

“…For SSA, however, the focus is still very much on external public debt, because of its historical dominance and, until lately, a lack of good-quality data on domestic debt (notable exceptions include Bua, Pradelli, & Presbitero, 2014;Ncube & Brixiov a, 2015). Our paper is closest to a set of recent studies that analyse the determinants of LCBM development in SSA econometrically: Adelegan and Radzewicz-Bak (2009), Berensmann et al (2015), Essers et al (2016) and Mu et al (2013). Unlike these studies, which narrowly focus on the determinants of LCBM capitalisation, we also investigate the covariates of LCB tenors and issue yields, exploiting a novel panel data set.…”