Cost of external debt and commodity price movement : a focus on African countries

Abstract

We question the lack of impact on borrowing costs, of Africa's resource endowment, especially during periods of higher prices for these commodity exports. Using a panel data of 19 African countries over 2000-2021, and deploying a battery of empirical techniques, we examine the effects of commodity price movement on sovereign bond spreads of African countries, and the related exorbitant cost of debt these countries bear whilst borrowing – “Africa premium.” We find that commodity price movement is an important driver of bond spread for Africa, working through two postulated channels – collateral and exchange rate channels: Commodity price movement, via the collateral channel, relates negatively to bond spread, whereas it relates positively to bond spread via the exchange rate channel. Commodity prices' influence on Africa's borrowing cost is stronger for low resource-endowed countries than it is for high resource-endowed countries. Bayesian Model Averaging results indicate that the level of financial development, external debt capacity, debt service, inflation, and the collateral and exchange rate channels are the dominant drivers of sovereign bond spreads in Africa. The “Africa premium” declines when we model commodity price movement in the bond spread of African countries. Finally, our other results have useful policy guides as well.

HIGHLIGHTS • There is a lack of impact on borrowing costs, of Africa's resource endowment and their prices movement. • There is an abnormally high cost of debt these countries bear whilst borrowing – “Africa premium.” • Annual panel data of 19 African and 16 emerging market countries over 2000-2021 used. • We find that commodity price cycles are an important driver of bond spreads for Africa. • Results from Bayesian Mean Averaging identified key explanatory variables most likely to explain sovereign bond spread • The so-called Africa premium is attenuated when commodity price cycle is modelled into Africa's bond spread.