The spillover effects of external economic shocks on African international sovereign bonds

Abstract

African nations are facing increasing debt repayment pressure and default threats as a result of the severe fiscal deficit, falling commodity prices, weakening global demand, the COVID-19 pandemic, the Russia-Ukraine war, etc. This paper uses the BVARSV model to build multiple exchange rate-import (export) commodity-spread systems to analyze the time-varying impact and intermediations of external economic shocks on sovereign bonds of three representative high-, medium-, and low-risk default nations—Zambia, Nigeria, and Egypt during the whole sample and critical times. The findings indicate that the linkages between the exchange rate and Egypt's spreads are time-varying but static in Zambia and Nigeria. Simultaneously, the spread system is unstable in Zambia while relatively stable in Nigeria and Egypt for distinct effects of exchange rate shocks. Also, the intermediated commodities are significant, especially for exported copper, exported crude oil and imported wheat in Zambia, Nigeria and Egypt, respectively. Moreover, The Fed's interest rate adjustments and the market environment caused by Covid-19 and Russia-Ukraine conflict explains for the changes in African bond spread in different stages. The paper's findings are useful for determining the sensitivity of African sovereign bond spreads to external economic shocks and guiding bond investors.