African Eurobonds: opportunities and challenges for sustainable economic growth after the HIPC initiative
29 May 2019
University of Antwerp, Stadscampus, Promotiezaal Grauwzusters Cloister - Lange Sint-Annastraat 7 - 2000 Antwerp (route: UAntwerpen, Stadscampus
Prof. dr. Danny Cassimon
PhD defence Christian Senga - Faculty of Business and Economics
Since 2006, countries from Sub-Saharan Africa (SSA) have been one after the other taping international capital markets to mobilize substantial funds through sovereign and government-guaranteed eurobonds. To the surprise of many, these eurobond issues have almost always been oversubscribed, thus indicating a high appetite of international investors for these securities. This investors’ enthusiasm is indeed puzzling since, just some years ago, this region was mired into a severe sovereign external debt crisis that could have not otherwise been solved but through debt forgiveness in the framework of the Heavily Indebted Poor Countries (HIPC) initiative by the International Monetary Fund and the World Bank.
Eurobond issuers and their proponents justify this move by the need for these countries to diversify their sources of development funding and, thereby, reduce their dependence on the already drying up foreign aid from developed countries. It is also seen as an opportunity for them to register on the investors’ radar and attract more foreign direct investment. However, some critics find this investors’ enthusiasm rather justified by their thirst for high yields outside their post-financial crisis domestic environment dominated by protracted low interest rates and sluggish economic recovery. They draw parallels between the current situation and the reckless lending of the 1970s that led to the above-mentioned debt crisis in developing countries, and warn about the possibility of its resurgence in SSA should this eurobond spree spiral out of control.
This thesis endeavors to tackle this important concern by investigating the sustainability of the SSA eurobond market, as well as its potential for economic growth in the issuing countries. It first scrutinizes the drivers of these bonds’ secondary market yields to grasp the incentives for the quality of macroeconomic management in the borrowing countries. Then, it explores the avenue of international portfolio theory to evaluates the possibility of diversification benefits that may provide alternative justification to the interest of international investors in SSA eurobonds. Finally, it investigates whether and how government borrowing through international capital markets affect investment dynamics in these countries.