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

Ismaila Souaré, Abdrahmane Wane, Babacar Sène and Marème Ndoye

International Review of Economics & Finance, 2024, vol. 96, issue PB

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.

Keywords: Eurobonds; Sovereign debt; Sustainability; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: F32 F34 H63 O12 O55 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:96:y:2024:i:pb:s1059056024005926

DOI: 10.1016/j.iref.2024.103600

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