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The determinants of sovereign risk premium in African countries

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  • Jane Mpapalika
  • Christopher Malikane

Abstract

This paper investigates the determinants of the sovereign risk premium in African countries. We employ the dynamic fixed effects model to determine the key drivers of sovereign bond spreads. Country-specific effects are fixed and the inclusion of dummy variables using the BaiâPerron multiple structural break test is significant at a 5% level. For robustness, the time-series generalized method of moments (GMM) is used where the null hypothesis of the Sargan Test of over-identifying restrictions (OIR) and the ArellanoâBond Test of no autocorrelation are not rejected. This implies that the instruments used are valid and relevant. In addition, there is no autocorrelation in the error terms. Our results show that the exchange rate, Money supply/GDP (M2/GDP) ratio, and trade are insignificant. Furthermore, our findings indicate that public debt/GDP ratio, GDP growth, inflation rate, foreign exchange reserves, commodity price, and market sentiment are significant at a 5% and 10% level.

Suggested Citation

  • Jane Mpapalika & Christopher Malikane, 2019. "The determinants of sovereign risk premium in African countries," 2019 Papers pmp2, Job Market Papers.
    • Handle: RePEc:jmp:jm2019:pmp2
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    2. Kiss, Gábor Dávid & Alipanah, Sabri, 2024. "Sovereign spread divergence owing to inflation and redenomination risk countered by unconventional monetary policy in the Eurozone," Economic Modelling, Elsevier, vol. 131(C).
    3. Ryota Nakatani, 2023. "Sovereign Debt Crisis and Fiscal Devolution," JRFM, MDPI, vol. 17(1), pages 1-8, December.
    4. David Edmund Allen & Elisa Luciano, 2019. "Risk Analysis and Portfolio Modelling," JRFM, MDPI, vol. 12(4), pages 1-4, September.
    5. Mwankemwa, Lusajo P. & Ndanshau, Michael O.A., 2021. "Asymmetric Effects of Fiscal Deficit on Monetary Policy Transmission in Tanzania," African Journal of Economic Review, African Journal of Economic Review, vol. 9(4), September.
    6. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.
    7. Adamu Braimah Abille & Maria Siranova, 2025. "Capital flight and sovereign bond spreads in Africa: implications for public debt sustainability," Economic Change and Restructuring, Springer, vol. 58(4), pages 1-39, August.
    8. Taguchi, Hiroyuki, 2021. "Determinants of country risk premium revisit: Evidence for emerging market and developing economies," MPRA Paper 107078, University Library of Munich, Germany.
    9. Jane Mpapalika, 2020. "Alternative Financing Instruments for African Economies," 2020 Papers pmp2, Job Market Papers.

    More about this item

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • G - Financial Economics

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