Performance determinants of local currency bond markets in African emerging economies

Submitted in accordance with the requirement for the degree of Doctor of Philosophy In Business Administration At the University of the Witwatersrand JohannesburgGenerating sufficient domestic revenues to finance economic growth has been a critical hurdle for many African countries and, for decades, foreign capital has complemented domestically generated resources to finance growth. However, global financial crises over the past few decades tend to curtail, if not dry up the flow of capital to African governments. The unreliability of foreign capital with its attendant strings and sudden stops in the event of economic and political crisis has spurred the need for alternative sources of financing development. Despite the realisation that bond markets provide a viable source of funds for the African continent, the literature on the importance of bond market development and its interaction with other sources of funding remains underexplored. Moreover, the sparse empirical literature about bond market development in Africa is vague and largely overlooked. At the same time, knowledge of African bond markets is vital for channelling funds not only to efficient agents in particular, but also for fostering transparency and the flow of information within the continent’s capital markets. This thesis endeavours to address the vacuum apparent in extant literature and proposes a theoretical framework through a thorough assessment of the determinants of bond market development in African emerging market economies. The thesis examines four critical pillars of bond market development: (a) the environment for the creation of bond markets; (b) the relative performance and characteristics of bond markets across and within developing and developed economies; (c) the modelling of bond markets and (c) the institutional factors that underpin the efficient functioning of bond markets. Using macroeconomic, social, institutional and historical data on local currency bond markets from 26 African economies and 49 listed firms, this thesis extends previous studies on bond market determinants through tighter robustness measures by accounting for downside risk in a generalized methods of moments (GMM) and a feasible generalized least squares estimator (FGLSE) framework. Further, differential analysis of government and corporate bond markets are carried out, given their different investment horizons and issuance. The results suggest that from a macroeconomic perspective, inflation, central government debt, GDP, external debt, GDP per capita and fiscal balance are important drivers of local currency bond market development in African economies. Moreover, political unrest, governance, religion, former colonial ties and culture are institutional factors that exert statistically significant effects on local currency bond market performance in Africa. From a demand viewpoint, the study finds that firm level factors that influence bond market performance are firm risk, size, profitability and age. The results from this study are of importance to capital market participants, investors, regulators and policy makers who seek to address the perennial constraints to development occasioned by lack of capital. A number of policy measures for boosting bond market performance such as stable macroeconomic environments, reform of capital market rules and cross listing are discussed in the final chapter. JEL CLASSIFICATION: International Economics; Financial Economics; Economic Development; Innovation; Technological Change; and Growth. KEYWORDS: Africa; Emerging economy; Bond market; Institutions; Local Currency Bond Market; Performance; Development.GR201