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The appendix discusses this figure in greater detail, to provide context for the analysis that follows. It cites market sources to show the contradiction between the pattern of over-subscription to the bonds and the high coupon rates charged, while describing the debt situations of the issuing countries. The analysis is preceded by a discussion of the data — a list of coupon-bearing sovereign bonds issued in Euro and US dollars between and The empirical analysis comprises reduced form linear regressions.
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In evaluating the pricing of bonds at issue, the primary econometric challenge is finding comparable bond issues — requires comparable countries and comparable bond features. Simple OLS identifies baseline case, with controls for these features. The first regression exercise takes the yield at issue of each bond as the dependent variable.
The selected set of predictors follows the pattern of papers like Hilscher and Nosbusch and uses measures of macroeconomic fundamentals as well as bond agency ratings. The primary measure of interest is a regional dummy to estimate whether unusually high coupon rates as associated with bonds issued by African governments or HIPC participants. Bond tenor is measured simply as the difference between the year of the issue date and the year of maturity.
The variable is included to correct for risks associated with the duration of the bond that is not already captured by the US Treasury yield curve. The fixed effects are dummy variables that represent region, continent and HIPC debt relief participation. Time dummies also capture the quarter in which the bond was issued. Because floating rate bonds generally involve lower coupon rates, a dummy for the bond type is also added to the regression. In testing whether African countries paid more to borrow from the international markets, one must first consider whether the borrowing countries were those most qualified to issue debt within the region.
The data, as shown in Fig. Sub-Saharan African Countries only. The large drop in debt around the turn of the century is largely due to debt forgiveness and restructuring. Therefore, it becomes interesting to know whether the countries that borrow are those with better macro-economic fundamentals. African international bond market participation is lower than the rest of the world, so comparison with larger economies outside Africa would be unhelpful.
Participation in the sovereign bond markets will be assumed to depend on country GDP, 8 GDP per capita, the ratio of foreign reserves to imports, trade surpluses, and the history of borrowing from multilateral lenders. All countries for which the explanatory variables are available in the WDI database are included in this regression. The dependent variable is a dummy that represents whether a country issued sovereign debt on the international markets between and the end of Finally, the regression will include an HIPC dummy intended to estimate whether countries selected for restructuring under this scheme are more likely to turn to the private debt markets for sovereign debt.
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Table 1 summarizes the coupon rates and its predictors for the subset of bonds with fixed or floating coupons. The table also includes sovereign credit ratings 11 , as well as the tenure of the bond — also known as tenor or duration to maturity. The debt to GDP ratio data is not available for a large share of countries that issued bonds.
The results are presented for this limited sample. The spreads on bonds issued by African governments are higher by 5. African governments generally have ratings and macroeconomic fundamentals below the group averages observed in the data.
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Therefore, this section examines whether all of this difference in the cost of borrowing is justified by observable risk factors. Table 2 shows that participants in the HIPC initiative pay higher coupon spreads at issue than the average country, even after controlling for global factors and country-specific risk indicators. The same also applies to countries from sub-Saharan Africa in general. This raises two questions that deserve further research in a separate paper — 1 why would African countries leave the option of low lending rates from the multilateral lending institutions for the higher interest rates of the private markets?
In interpreting the linear regression estimates — presented in Table 2 , sub-Saharan African countries paid coupon rates at least 2. HIPC participants paid bond coupon rates that were not statistically different from the mean after controlling for other predictors. The reported R 2 values are adjusted downwards to account for the high number of time fixed-effects and ratings variables. Interpreting columns 1—3 of the table gives a conclusion that does not utilize much of the variation in the data.
There are only five SSA countries represented in the smaller sample Gabon, Ghana, Nigeria, Rwanda and Zambia , and only 7 of the 19 bonds issued after from the region. When the debt to GDP ratio variable is dropped from the estimation, the sample size increases to These results are shown in columns 4—6. The apparently biased results of these columns do not, however, contradict the main implications of columns 1—3.
The evidence suggests that bonds issued by African governments tend to incur higher interest payments to investors, even after considering risk, as measured by rating, and their ability to pay as measured by foreign reserves. This is contrary to findings by Mecagni et al. As we argue in the introduction and show in the preceding paragraphs, our approach uses more controls than the IMF study.
Specifically, we incorporate variables representing perceptions of risk. The country-specific risk proxies yield coefficients that fit expectations. Sovereign bond ratings also correctly predict higher coupon rates. The variables used to predict participation in the international private sovereign bond markets are summarized in Table 3.
The samples of interest here are the 42 sub-Saharan African countries represented in the first panel of the table and in the second panel — the countries for which macroeconomic data are available. The summary data is broadly consistent with expectations.
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A smaller fractions of African countries issued bonds on international markets compared to broader set of countries in the global economy — the bond issue dummy for African economies is about half of the comparable population. Similarly, as expected, debts and concessional debts as a share of GDP are higher for African economies. The reserve to imports ratio is also lower for African economies, suggesting the need to control for the relative availability of foreign reserves in the estimation that follows. Finally, given the concern that international bond issues could drive a return to crises for HIPC countries — recent beneficiaries of debt relief, Table 3 suggests checking whether HIPC countries are more likely than average to issue foreign debt.
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HIPC countries are almost all African. These summary statistics provide context for the analysis that follows: examining whether African countries that issued international bonds appear to differ remarkably from the global set of bond issuers in terms of these macroeconomic fundamentals. Another way of setting up the question: how much better are the 11 of 42 SSA countries that issued dollar bonds than their SSA peers? Do they stand out as well as the 54 of countries that issued bonds?
Table 4 shows a positive correlation between larger, richer economies with recent trade deficits and offering loans on the sovereign bond markets after The first three columns represent a linear probability model — a simple OLS regression on the dummy variable that indicates whether a country issued a bond overseas. The last three are probit regressions, which assume a normal distribution for the innovations in the predictor variables. The HIPC dummy in column 2 does not change the observed estimates in any significant manner. This preliminary check of correlations allays the concern that countries selected for the HIPC initiative are more likely to return to the debt markets right after obtaining relief for old debts.
Large economies, and to a less significant level, richer economies are more likely to issue external debt in private markets. This is true for African economies, as it is true outside the continent according to column 3 of the table. The results also suggest that countries with low ratios of foreign reserves to imports, as well as those with low trade surpluses are more likely to be on the list of bond issuers.
Taken at surface value, this is less encouraging, and suggests the risk that borrowing countries may face balance of payments challenges when the bonds come due. Foreign currency taken to make local infrastructure investments in the typical case is unlikely to produce funds in the required currency for repayment. These two coefficients favor the view that the countries issuing debt are lower risk than the general pool.
This regression is by no means a test of whether countries consider concessional debt and private as substitutes, but it suggests that countries with lower than average concessional debt share of the total debt portfolio are more likely to be in the sovereign debt sample. However it could also be that the IMF and World Bank have more leverage over poorer African countries in blocking their participation in the sovereign debt markets or that concessional debt is seen by nations as not so concessional when you consider the punishing conditionality that accompanies it.
The probit estimator for the HIPC dummy suggests that countries taking part in this scheme are more likely to issue private bonds; however, when one considers that several debt relief negotiations involved repackaging old debt into bonds the effect becomes insignificant The appendix further discusses the history of each of the sovereign debt issues from sub-Saharan Africa. This section of the results indicate that after controlling for country features like the HIPC designation, African countries issuing debt are largely comparable with their global peers. The African countries that issued debt in dollar markets between and the first half of generally had better macroeconomic fundamentals than their African peers — more so than the average bond issuing country stands out from the set of economies for which we have data.
The data indicate that the last decade of high average export and GDP growth means that borrowing is less risky for many African countries. This has allowed many, especially the larger and relatively wealthier African economies, to return to the private markets for international bonds. HIPC participants are no more likely than the average country to seek debt from the international private markets. Nevertheless, African governments pay a premium in borrowing costs — about 2. Higher coupon payments not explained by observable risk measures may only be described as a penalty on African governments due to investor bias.
This additional cost of borrowing arguably represents a penalty from the markets that could be applied to offer better development prospects. What are the proceeds used for? How are the bonds they issue received on the international debt markets? This appendix provides some of the background, gathered from news sources and official documents on each of the African sovereign bonds issues that form the subject of this paper.
In all, excluding South Africa, there have been 24 bonds issued by a dozen sub-Saharan countries between and A selection of these are discussed. The markets seemed to think the issue was overpriced at that time, as the yield fell basis points in secondary trading to reach 4. According to the Ghanaian press, the funds from the issue were invested in energy and transport infrastructure, as intended.
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The success of the first bond issue appeared to make the case for a second foray to the international debt markets. By the summer of a plan to issue a second tranche of debt on the private markets was approved by the Ghanaian legislature, motivated in part by the need for infrastructure investment IOL, On August 7, Ghana issued a year Eurobond.
This was not as oversubscribed as the first issue. The government announced plans to spend the proceeds on ports and electrical infrastructure.
Ghana issued yet another Eurobond on September 11, It was oversubscribed at a ratio. The timing was just prior to its negotiations with the IMF, and was viewed by many to strengthen its bargaining position Bigg and Kopodo, Clearly the IMF was not too pleased. Following the issue:. According to her, unless Ghana and other African states are borrowing from the international market to finance infrastructure, Eurobonds may not be a good thing. Business News of Saturday, This bond was issued as part of a sovereign debt restructuring negotiation between Congo.