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.

What drives local currency bond market development in Saudi Arabia: do macroeconomic and institutional factors matter?

“…The positive sign of the coefficient assigned to GDP per capita suggests that Saudi economy has attained a certain degree of development allowing it to have larger government bond market. These results seem to be in line with the most studies’ findings on the determinants of BMD [ 62 , 11 , 21 , 51 , 52 ]…”

“…Notwithstanding the growing body of literature that emerged examining the determinants of BMD, this paragraph is not intended to provide an exhaustive review of the theoretical and/or empirical related literature. In this regard, the main studies examining the factors affecting the size of LCBMs in different regions are: Claessens et al [ 43 ], Eichengreen and Luengnaruemitchai [ 11 , 44 ], Luengnaruemitchai and Ong [ 45 ], Eichengreen et al [ 46 ], Borensztein et al [ 47 ], Burger and Warnock [ 48 ], Adelegan and Radzewicz-Bak [ 49 ], Garcia-Kilroy and Silva [ 50 ], Bhattacharyay [ 15 ], Felman et al [ 18 ], Gray et al [ 19 ], Burger et al [ 16 ], Ayala et al [ 13 ], Khalid and Rajaguru [ 51 ], and Ahwireng-Obeng and Ahwireng-Obeng [ 52 ].…”

Micro and Macroeconomic Determinants of Indonesian Government’s Bonds Liquidities in the Secondary Market (2012-2016)

“…These results underscore the importance of macroeconomic variables in explaining determinants of government bond liquidity. The result is similar to Ang & Piazzesi (2003) who found that macroeconomic factors contribute to 85% of the variations as well as Ahwireng-Obeng (2016) in the case of 26 African countries. The result is also similar with the case of corporate bonds, as documented in Nigerian bond market (Nkwede, Uguru, & Nkwegu, 2016).…”

What Drives Return of Sukuk in the Long and Short Terms?

“…The results of this study are also in line with research conducted by 39 , 40 , 41 , and 42 which argued that inflation had no significant effect on bond yields. Viewed from the direction of the coefficients, the results of this study are in line with 43 and 44 which state that inflation has a negative impact on the development of the state bond market. He further explained that the insignificance of the inflation variable reflects the development of a less developed financial market in a country.…”