Beyond Aid: How Much Should African Countries Pay to Borrow?

IMF Working Papers, June 1, 2010

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Post debt relief, the number of African countries considering accessing international capital markets, often to fund large infrastructure projects, is increasing.
Potential risks of capital inflows are well known but the literature offers little help to estimate the cost of borrowing internationally for the first time.
This paper proposes a two-step approach to estimate the sovereign credit rating and interest rate cost of a country considering borrowing externally.
Estimates can be used to assess the costs and benefits of different financing options.
The method can also be used to construct foreign currency as well as domestic local currency yield curves.

Step 1: Estimate the sovereign credit rating for a country considering borrowing externally.
Step 2: Estimate the interest rate cost (sovereign yield) associated with the estimated credit rating.
The resulting estimates support construction of foreign currency and domestic local currency yield curves.

Assessing the costs and benefits of different financing options for countries entering international capital markets.
Constructing yield curves in both foreign currency and domestic local currency for emerging and frontier markets.

Quantitative estimates of sovereign credit ratings and interest rate costs provide practical inputs for debt management decisions when countries contemplate first-time access to international capital markets.
Constructed yield curves (foreign and domestic) facilitate comparison of financing costs across instruments and currencies, informing choices about external borrowing for infrastructure and other investments.

IMF Working Paper by Cheikh A. Gueye and Amadou N Sy, "Beyond Aid: How Much Should African Countries Pay to Borrow?", June 1, 2010.