Submitted in accordance with the requirement for the degree of Doctor of Philosophy In Business Administration At the University of the Witwatersrand Johannesburg / Generating sufficient domestic revenues to finance economic growth has been a critical hurdle for many African countries and, for decades, foreign capital has complemented domestically generated resources to finance growth. However, global financial crises over the past few decades tend to curtail, if not dry up the flow of capital to African governments. The unreliability of foreign capital with its attendant strings and sudden stops in the event of economic and political crisis has spurred the need for alternative sources of financing development. Despite the realisation that bond markets provide a viable source of funds for the African continent, the literature on the importance of bond market development and its interaction with other sources of funding remains underexplored. Moreover, the sparse empirical literature about bond market development in Africa is vague and largely overlooked. At the same time, knowledge of African bond markets is vital for channelling funds not only to efficient agents in particular, but also for fostering transparency and the flow of information within the continent’s capital markets. This thesis endeavours to address the vacuum apparent in extant literature and proposes a theoretical framework through a thorough assessment of the determinants of bond market development in African emerging market economies. The thesis examines four critical pillars of bond market development: (a) the environment for the creation of bond markets; (b) the relative performance and characteristics of bond markets across and within developing and developed economies; (c) the modelling of bond markets and (c) the institutional factors that underpin the efficient functioning of bond markets. Using macroeconomic, social, institutional and historical data on local currency bond markets from 26 African economies and 49 listed firms, this thesis extends previous studies on bond market determinants through tighter robustness measures by accounting for downside risk in a generalized methods of moments (GMM) and a feasible generalized least squares estimator (FGLSE) framework. Further, differential analysis of government and corporate bond markets are carried out, given their different investment horizons and issuance. The results suggest that from a macroeconomic perspective, inflation, central government debt, GDP, external debt, GDP per capita and fiscal balance are important drivers of local currency bond market development in African economies. Moreover, political unrest, governance, religion, former colonial ties and culture are institutional factors that exert statistically significant effects on local currency bond market performance in Africa. From a demand viewpoint, the study finds that firm level factors that influence bond market performance are firm risk, size, profitability and age. The results from this study are of importance to capital market participants, investors, regulators and policy makers who seek to address the perennial constraints to development occasioned by lack of capital. A number of policy measures for boosting bond market performance such as stable macroeconomic environments, reform of capital market rules and cross listing are discussed in the final chapter. JEL CLASSIFICATION: International Economics; Financial Economics; Economic Development; Innovation; Technological Change; and Growth. KEYWORDS: Africa; Emerging economy; Bond market; Institutions; Local Currency Bond Market; Performance; Development. / GR2018

Thesis (MBA) -- Stellenbosch University, 2010. / As major corporate entities are investing into Sub-Saharan Africa and other African countries at a fast pace, percentages like the weighted average cost of capital (WACC) and the impairment discount rate, are becoming important measurements of assessing current investments for impairment and/or proposals of future capital investments. One of the important constituents of these percentages is the country/equity risk premium. The country risk premium can be defined as the price for taking risk for investing in that specific country. A widely used method to determine the country risk premium is to multiply the country bond default spread with an equity to bond market risk adjustment. Country bond default spreads are the spreads that investors charge for buying bonds issued by the country. These ratings measure default risk, rather than equity risk, but they are affected by many factors that drive equity risk, like the stability of a country’s currency, the budget and trade balances and the political stability. Analysis that uses spreads as a measure of country risk, usually adds them to both the cost of equity and debt of entities that trade in that country. There are several ways in determining the bond default spreads, but it is most often done in a random and unsystematic manner. Two of the major obstacles in determining these spreads for countries, especially countries of sub-Saharan Africa, are when countries do not issue bonds in another currency such as Euro or US dollar and/or do not have a sovereign credit rating. What could also be a measure of country risk, are the two major country risk polls conducted globally: 1) Euromoney Country Risk Poll; and 2) PRS (Political Risk Group) Composite Risk Ratings. Most of sub-Saharan African countries form part of these risk polls. The usefulness of the PRS scores as a measure of country risk has been previously examined to find that they are correlated with the cost of capital of emerging markets. The aim of the research is to overcome the obstacles in determining default spreads for countries such as sub-Saharan Africa where bond markets are inactive and/or sovereign credit ratings are not assigned, by deriving a predictive model. The predictive model is derived by analysing the relationship between the available estimated default spreads that are assigned to a specific country, depending on their Moody’s sovereign local currency rating and the countries’ respective country risk scores conducted by Euromoney and PRS respectively. The stability of the relationship is also analysed by comparing the prediction of the sub-Saharan’s Africa default spreads based on the 2010 predictive model to the analyses conducted on 2008 data sets. Other similar models have been developed, but this model is focused on the total risk score of a country and not only on the credit risk or related constituents. One of the definitions of country risk is that it relates to the likelihood that changes in the business environment will occur that reduce the profitability of doing business in a country, which can negatively affect operating profits as well as the value of assets. One can conclude that this derived model is a good reflection of prevailing political and economic stability of the countries and a useful measure of country risk that can be used in assessing the profitability of current investments in a specific country and for proposals of future capital investments. Key words: Country bond default spreads, Sovereign credit ratings, Euromoney risk scores, PRS composite ratings, sub-Saharan African countries.