Local Currency Bond Market Development in Sub-Saharan Africa: A Stock-Taking Exercise and Analysis of Key Drivers

Abstract

This paper studies the current state and drivers of government local currency bond market (LCBM) development in Sub-Saharan Africa. We argue that well-developed government LCBMs could reduce countries' exposure to external shocks; help overcome 'original sin'; facilitate domestic savings mobilisation; and may have important financial, macroeconomic and institutional spill-overs. With detailed information collected from various sources the paper first shows that quite a few African countries have made significant progress in developing LCBMs. Increasingly, African governments issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. However, we also find that LCBMs in Africa often have low liquidity, feature very few corporate securities and generally have relatively narrow investor bases dominated by commercial banks. The second part of the study presents an econometric analysis of the drivers of African government LCBMs based on a new high-quality panel dataset compiled by the OECD. Our results indicate that LCBM capitalisation is correlated negatively with governments' fiscal balance and inflation, and positively with common law legal origins, institutional quality and strong democratic political systems.

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

“…Following existing studies on the determinants of LCBM development such as Essers et al (2015) and Mu et al (2013), we employ a model of the following form:…”

“…The AFMI data are available for a larger set of SSA countries than the set of countries included in the analysis by Essers et al (2015), 6 allowing us to gain insights on the correlates of LCBM development based on a different and larger set of countries. Our analysis is also different from other studies in that we focus on treasury bonds of a maturity of 1 year or greater.…”

“…Our analysis is also different from other studies in that we focus on treasury bonds of a maturity of 1 year or greater. While for instance Essers et al (2015) include short-term government securities with a maturity of less than 1 year in their analysis, we exclude them because short-term securities may be less appropriate instruments to finance the long-term investments needed to achieve the SDGs.…”

“…The greater availability of (potential) buyers and sellers in larger-sized economies may also enhance bond market development by reducing price volatility (Eichengreen and Luengnaruemitchai, 2004). We use the natural log of GDP in Following Essers et al (2015) and Mu et al (2013), we also include a measure for trade openness. Trade openness may be positively correlated with financial development for several reasons.…”

“…In the dataset constructed by Bua et al (2014), however, domestic debt refers primarily to debt owed to residents, rather than to debt denominated in local currency, which is the focus of our paper. In another recent study, Essers et al (2015) Drawing from the African Development Bank's AFMI database, among others, we compile a dataset comprising 27 SSA countries, ranging over a maximum of 14 years, namely the period 2000-13. For sure, our sample size remains limited as well, weakening the power of statistical tests, and the time span of data on the stock of local currency bonds differs across countries in our dataset.…”