Key Determinants of Government Bond Market Development In MEFMI Region

By Leonard Thotho
2015

This paper intends to investigate the major determinants of government bond market development in five MEFMI1 countries namely Tanzania, Mozambique, Kenya, Uganda and Zambia, using data obtained in the period between 2003 and 2012. The paper assesses whether identified macroeconomic factors influence bond market capitalization as a measure of bond market development; evaluates the nature of relationship between financial market variables with bond market capitalization and seeks to identify structural factors that may have strong relationship with bond market capitalization.

Variables investigated in this study are classified as macroeconomic, structural, financial or developmental in nature. Interest rate and exchange rate variability, capital openness and fiscal balance make up macroeconomic variables while economic size and trade openness are categorized as structural. The size of the banking sector and spread in interest rates are financial sector variables while GDP per capita is categorized as developmental.

This study has attempted to identify the major determinants of government bond market development in the countries afore-named using econometric analysis and involving simple ordinary Least Squares (OLS), multivariate OLS, Fixed Effects and Random Effects models while also applying relevant sensitivity analysis to cater for country specific situations.

From the findings, a combination of structure, policy and institutional variables have statistically significant influence on government bond market development (bond capitalization) under different estimation methodologies. In the simple OLS, fixed effects and random effects; variables that were found positive and significant are; bank credit, capital account openness, exchange rate variability, legal origin, size of the economy and economic development. In the multivariate OLS, fixed effects and random effects estimations; bank credit to private sector, exchange rate variability, economic development, monetary freedom showed positive and significant relationship with government bond market capitalization. Finally, the multivariate sensitivity analysis in OLS, fixed effects and random effects models under different scenarios (1, 2 and 3); exchange rate variability, fiscal freedom, fiscal balance, interest rate fluctuation, interest spread, economic development and monetary freedom are largely positive and significant in influencing bond capitalization.