Navigating the Evolving Landscape of External Financing in Sub-Saharan Africa

The landscape of external funding flows to sub-Saharan Africa (SSA) has evolved significantly over the past two decades. This paper provides an overview of the non-official external financing sources, emphasizing the trade-offs between foreign and domestic currency-denominated debt. Using data from emerging and developing economies, we assess the likelihood of issuing Eurobonds or borrowing in the syndicated loan market, focusing on the implications for SSA. We also analyze the main drivers of yields at issuance and bond spreads, along with the reliability of credit ratings and the potential existence of an "African risk premium". Our findings suggest that global factors such as the US dollar and interest rates, along with domestic characteristics, including governance and political risk, play an impotant role. Once fundamentals are considered, we find limited evidence of credit rating agencies’ bias against the region and a modest extra risk premium in normal times. As an alternative to external financing, SSA countries have been recently issuing more domestic-currency debt, reducing exchange rate risks but facing challenges in attracting foreign investors due to underdeveloped local debt markets.