Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck?

Abstract

Greater access to international capital markets has meant that many African countries now owe a significant share of their debt to private bondholders, traded in secondary debt markets around the world. Assessing sovereign debt challenges for the continent will have to take on different forms, expanding beyond the traditional definitions of debt distress to broader market-oriented measures that identify crises through movements in sovereign bond spreads. In this paper, we use duration models to identify recent debt distress and recovery episodes in Africa from a market-oriented approach, pinning down the entry points, the duration, and exit points of recent debt crises in Africa’s frontier market economies. Using the identified debt distress episodes, we examine the role of the external global environment, the domestic policy environment, and the presence of an international financial institution (IFI)-supported programme in explaining the duration of debt distress and the process of recovery. Our results indicate that favourable external conditions combined with sound domestic policy and the presence of an IFI-supported program contribute to shorter episodes of bond market crisis. Specifically, higher commodity prices, lower global interest rates, stronger political institutions, more robust reserves, and lower levels of short-term debt shorten the duration of debt crises in Africa. Thus,both good policies and good luck have played complementary roles in facilitating recovery from debt distress in Africa