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Sustainability of lending diversification of sub-Saharan African low-income countries

Author

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  • Souaré, Ismaila
  • Wane, Abdrahmane
  • Sène, Babacar
  • Ndoye, Marème

Abstract

The momentum in sub-Saharan low-income countries is leading to diversifying their funding sources to cover large infrastructure expenditures. This situation meets the expectations of international investors who are still willing to explore new opportunities. Recent access to the Eurobond market by these new players has resulted in the growing substitution of traditional concessional loans by market ones in countries with low-debt portfolios. Thus, a new sustainability approach is required to include risk premiums and potentially versatile investor behaviors. First, we use a theoretical model to show that in a context of low international interest rates, debtor countries can continue to stabilize their level of debt either through budget deficit, if it remains below a given sustainability threshold, or through budget surplus in a downturn context (high-interest rates and spreads). Second, the versatile behavior of investors could be challenging. Third, global liquidity greatly influences the debt dynamics of SSA countries so it matters more for bond spreads than domestic factors. As our empirical study shows that the current debt situation of sub-Saharan African low-income countries increasingly involved in the Eurobond market remains under control. To avoid the worst-case scenario, strong institutions should be a priority, along with appropriate management tools and methods of debt monitoring to cope with all potential vulnerability caused by undesirable side effects of such unstable behaviors.

Suggested Citation

  • Souaré, Ismaila & Wane, Abdrahmane & Sène, Babacar & Ndoye, Marème, 2024. "Sustainability of lending diversification of sub-Saharan African low-income countries," International Review of Economics & Finance, Elsevier, vol. 96(PB).
  • Handle: RePEc:eee:reveco:v:96:y:2024:i:pb:s1059056024005926
    DOI: 10.1016/j.iref.2024.103600
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    More about this item

    Keywords

    Eurobonds; Sovereign debt; Sustainability; Sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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