Local currency bond market development in Sub-Saharan Africa: A stock-taking exercise and analysis of key drivers

Essers, Dennis and Blommestein, Hans and Cassimon, Danny and Ibarlucea Flores, Perla (2015): 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: public debt; local currency bonds; Sub-Saharan Africa
• Subjects: H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

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