The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Does gross or net debt matter for long-term sovereign spreads in emerging markets? The
topic is important for undestanding the borrowing cost implications of public assetliability
management decisions (e.g. using assets to lower debt). We investigate this
question using data on emerging market economies (EMEs) over the period 1998-2014.
We find that both gross debt and assets have a significant impact on long-term sovereign
bond spreads in emerging markets, with effects roughly offsetting each other (coefficients
of opposite sign and similar magnitude). Hence, net debt seems more appropriate than
gross debt when evaluating the impact of indebtedness on spreads. The empirical results
suggest that an increase in net debt by 10 percentage points of GDP implies an increase in
the spread by 100-120 basis points, and the effect is larger during periods of domestic
distress. The key results from this empirical study are quite robust to alternative
specifications and subgroups of EMEs.