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Eurobonds, debt sustainability and macroeconomic performance in Africa: Synthetic controlled experiments

There has been a strong wave of Eurobond issuances by Africa’s frontier market economies since the start of the century. But it is not clear how these issuances have affected economic performance. This paper uses synthetic control experiments to conduct comparative case study analysis to assess whether sovereign Eurobond issuances have had the expected impacts on economic growth, debt sustainability, and domestic capital markets as indicated in the issue prospectuses. We compare the evolution of several indicators of economic performance, post-Eurobond issuance, against their synthetically constructed counterfactual trajectories in the absence of Eurobond issuances. The results show that sovereign Eurobond issuances have accelerated the evolution of per capita GDP in Africa. The magnitude is equivalent to about 10 percent on average, ten years following the intervention. Although most issuances were within 3 percent of GDP, they potentially led to a 13-percentage points acceleration in the debt-to-GDP ratios ten years after issuance, compared to the no-issuance counterfactual scenario. The evidence on the effect of Eurobond issuances on capital accumulation is inconclusive, although we find a strong positive correlation in selected countries. We did not find any systematic impact of Eurobond issuances on domestic capital market development. In sum, despite some unsuccessful cases, the effect of Eurobond issuances on Africa’s frontier market economies has been positive but susceptible to increasing debt vulnerabilities.