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 the development of government local currency bond markets (LCBMs) in Sub-Saharan Africa, a region whose progress in developing such markets has only recently received attention in the literature. We argue that well-developed LCBMs could reduce countries’ exposure to external shocks; help wash away or reduce ‘original sin’; facilitate the mobilisation of domestic savings; and may have important financial, macroeconomic and institutional spill-over effects. With detailed information collected from various sources the paper first shows that quite a number of African countries have made significant strides in this area. Increasingly, governments in the region issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. This does not imply all is well. We 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 new results on the drivers of LCBMs based on an econometric analysis of new panel data collected by the OECD. Our results indicate that LCBM capitalisation in selected African countries is negatively correlated with governments’ fiscal balance and relatively high inflation, and positively related to common law legal origins, better institutional quality and strong democratic political systems.