Sub-Saharan Africa’s Risk Perception Premium: In the Search of Missing Factors
IMF Working Papers, June 23, 2023
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Bibliographic details
- Authors: William Gbohoui, Rasmané Ouedraogo, Yirbehogre Modeste Some
- Published: June 23, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400242144.001
Overview
- Research question: Do sub-Saharan Africa (SSA) sovereign issuers face an excess "risk perception premium" in international financial markets that leads to "unjustifiably" high borrowing costs?
- Two-fold empirical approach:
- Primary market analysis of international sovereign fixed coupon bonds.
- Secondary market analysis of refinancing costs using a panel of countries and time series data.
- Core conclusion: The excess SSA premium estimated in basic specifications vanishes when structural factors—transparency of budget process, importance of the informal sector, level of financial development, and quality of public institutions—are accounted for.
Data and Methods
- Primary market sample:
- 1,592 international primary sovereign fixed coupon bonds.
- Issuance period: 2003-2021.
- Source: Bond Radar.
- Coverage: 89 countries.
- Secondary market sample:
- Unbalanced panel of quarterly data.
- Coverage: 107 countries.
- Time span: 1990 – 2022.
- Empirical focus:
- Compare coupon at issuance across regions.
- Assess refinancing costs in the secondary market.
- Test sensitivity of spreads to structural dimensions where SSA faces acute challenges.
Key Findings
- Primary market:
- SSA countries pay significantly higher coupon at issuance compared to peers from other regions (based on the 1,592-bond sample from 2003-2021).
- Secondary market:
- SSA countries pay higher refinancing costs in the secondary market (based on the unbalanced quarterly panel covering 107 countries over 1990 – 2022).
- Structural factors:
- When controlling for:
- transparency of budget process,
- importance of the informal sector,
- level of financial development,
- quality of public institutions,
- the estimated excess premium for SSA countries disappears.
Structural Dimensions Explored
- Transparency of budget process.
- Importance of the informal sector.
- Level of financial development.
- Quality of public institutions.
Implications and Interpretations
- The observed higher borrowing costs for SSA issuers are linked to measurable structural characteristics rather than an unexplained regional bias after accounting for the listed dimensions.
- Policy emphasis on improving budget transparency, formalizing economic activity, advancing financial development, and strengthening public institutions could reduce the perceived or priced risk associated with SSA sovereign debt.
William Gbohoui, Rasmané Ouedraogo, and Yirbehogre Modeste Some; June 23, 2023. IMF Working Paper No. 2023/130. DOI: https://doi.org/10.5089/9798400242144.001
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