Drivers of Domestic Government Bond Market Growth in Selected Countries in Eastern and Southern Africa

Abstract

Different countries in Eastern and Southern Africa (ESA) have experienced different levels of growth of their domestic Government bond markets due to various factors. This study aimed at evaluating the drivers of the growth of domestic government domestic bond markets in selected countries in Eastern and Southern Africa during the period 2003-2015. The main study problem is the inability of countries to sustainably fund their budgetary deficits from dependable and reliable local sources. Chances of African countries accessing concessional external financing from bilateral and multilateral lenders, or the international capital market have reduced due to shifting global priorities and debt crisis in the first world countries. Even countries that rely on commodity exports (such as oil and minerals) have experienced budgetary shocks due to volatility in the global commodities market. As such, the domestic government bond market is becoming more important as a homegrown and reliable source of government financing and for the development of the domestic capital market. This study assessed the drivers of the growth of the domestic government bond market in selected countries in Eastern and Southern Africa during the period 2003 to 2015. The specific objectives for the research were to assess the effect of size of the banking sector, interest rate trend, trade openness, size of the economy and fiscal balance (used as the moderating variable) on domestic government bond markets growth in selected countries in Eastern and Southern Africa. The study adopted the Functional Finance theory, Arbitrage Pricing theory, Interest Rate Structure theory and Liquidity Preference theory. The positivism research philosophy was used in this study because observations of variable trends were independent with no human interest; explanations demonstrated causality; generalization was through statistical probability; research progressed through hypotheses and deductions and concepts were operationalized for purpose of measurement. Descriptive research design was used and annual secondary data collected from the World Bank Development Indicators (WDI), OECD’s African Statistical Year book and International Financial Statistics by the IMF. A data collection schedule (MS Excel) was used as a tool to collect time series data for a period of 12 years from 2003 to 2015. The target population consisted of 21 countries in Eastern and Southern Africa from which five countries namely Kenya, Tanzania, Uganda, Zambia and Mozambique were chosen through purposive sampling. These countries are chosen because they have been implementing deliberate reforms to enhance the growth of their domestic government bond markets since 2000s, in addition to, data availability. Panel Ordinary Least Squares (POLS) was used to determine the effect of the independent variables on domestic government bond markets growth (measured as bond market capitalization) in selected countries in Eastern and Southern Africa and data was analyzed using E-views 8. Various diagnostic tests such as stationarity, normality, multicollinearity, and granger causality among others were undertaken. From the empirical results, banking sector size and size of the economy had positive and significant effect on the growth of the domestic Government bond market while openness of trade was negative and significant. The study provides pointers for priority areas in the development of the domestic government bond markets in Eastern and Southern Africa region, including initiatives to promote larger financial (banking) sector, stimulate economic growth to achieve larger economies and promote open trade but conscious of the effect of capital flight as a result of massive exit of foreign investors from the domestic market. This study contributed to filling knowledge gaps in determining the drivers of domestic government bond market growth in Eastern and Southern Africa during the period 2003 to 2015.