Macroeconomic determinants of sovereign bond market development in African emerging economies

Abstract

Purpose Despite being a viable source of funds, African sovereign bond markets are relatively underexplored. The empirical literature fails to consider the impact of exclusively macroeconomic factors and the volatile contexts in which African markets operate. The purpose of this paper is to fill the vacuum by proposing a context-sensitive theoretical framework. The study targets, specifically, macroeconomic factors and assesses the extent to which they affect bond market development. Design/methodology/approach Using panel data on sovereign bond markets from 26 African economies, the study extends previous methodologies used in similar studies by accounting for downside risk in a generalized method of moments (GMM) framework and employing tighter robustness measures. Findings This study finds that inflation, domestic debt, external debt, GDP at PPP, fiscal balance and exports are important macroeconomic drivers of sovereign bond market development in African emerging economies. Research limitations/implications While GMM estimation is beneficial in the presence of endogeneity between the dependent variables that are instrumented with lagged independent variables, it guarantees consistency but, not unbiased estimations. Practical implications Market-oriented government funding with well-defined debt management strategies must be implemented to support the development of sovereign bond markets. External debt must be set at a sustainable level, and government should be dedicated to the confirmation of this. Furthermore, inflation rates must be kept low and stable. Social implications If policymakers are to take this study seriously, bond markets may begin to be viable sources of funds for African emerging economies. Originality/value This study introduces a methodology for measuring bond market development that considers the systemic volatility in emerging markets and proposes a theoretical framework for African emerging economies. In addition, the authors identify a new macroeconomic determinant of bond market development in the region.