Interest Rate Macrostructure, Corporate Bond Market Development And Industrial Output In Selected African Economies

ABSTRACT

This study examines the effect of interest rate macrostructure and corporate bond market development on

industrial output growth in some selected African economies from 1995-2014, namely Botswana,

Cameroon, Cote d’ Ivoire, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tanzania, and Tunisia. In the World industrial output statistics, African economies have consistently ranked least and its pace of industrial output growth has been the least. The lapse in industrial output and the growth rate appear related to the underdeveloped corporate bond market, as their financial system over-relies on short term funds to finance industrial output growth. The study also deduces that the oligopolistic structure of the economies’ bank dominated intermediation system is linked to the drawback, as African commercial banks have been profiting from the perverted interest rate structure. The study introduces short run innovations to Toda-Yamamoto and Autoregressive Distributive lag methodologies,

in an unbalanced panel data, sourced from World Bank Development and Worldwide governance

indicators, Bank for International Settlements and the African Securities Exchanges from 1995-2014. The short run dynamic coefficients satisfy a priori expectations, which indicate joint influence flows and cointegration among industrial output, corporate bond issue, interest rate spread, technological development, and real per capita income. The long run results suggest that interest rate spread negatively influences industrial output. Corporate bond issue negatively influences interest rate spread, which suggests potency of the bond market to manage the spread. Corporate bond issue does not significantly impact industrial output; sovereign bond issue positively correlates with corporate bond issue. Corporate bond turnover does not link industrial output, while its nexus with corporate bond issue does not produce significant

positive linkage, which suggests lack of signaling impact. Inflation expectation does not significantly

influence interest rate spread, rather it is the spread that positively influence inflation, which suggests that inflation may be more of structural and institutional lapses than monetary phenomenon. Public debt positively links inflation expectation, but negatively influences bank competitiveness; and technological development negatively influences industrial output, which suggests poor human capital-industry linkage. The study recommends market-based economies; private investments in bond market Exchanges and investment banking institutions, full financial liberalization, with prudential regulation, and fiscal support for non-finance corporations to encourage bond issuing; tax and regulatory incentives for bank competitiveness towards interest rate reduction; review budgetary system on education for technological development; should encourage college-industry reorientation and interface. Overall, the study did not affirm the finance-led growth hypothesis of economic development in the selected economies.