Arora, Vivek, and M. Cerisola, 2000, “How Does U.S. Monetary Policy Influence Sovereign Spreads in Emerging Markets?” International Monetary Fund Staff Papers, Vol. 48, No. 3, pp. 474–98.
Ferrucci, Gianluigi, 2003, “Empirical Determinants of Emerging Market Economies’ Sovereign Bond Spreads,” Working Paper No. 205 (London: Bank of England).
Hameed, Farhan, 2005, “Fiscal Transparency and Economic Outcomes,” forthcoming IMF Working Paper (Washington: International Monetary Fund).
Hauner, David, 2005, “A Fiscal Price Tag for International Reserves,” IMF Working Paper No. 05/81 (Washington: International Monetary Fund).
Hauner, David, and Manmohan S. Kumar, 2005, “Interest Rates and Fiscal Policy,” forthcoming IMF Working Paper (Washington: International Monetary Fund).
IMF, 2003, “Assessing and Promoting Fiscal Transparency: A Report on Progress” (Washington: International Monetary Fund), available at http://www.imf.org/external/np/pdr/sac/2003/030503s2.htm.
Kamin, Steve B., and Karsten von Kleist, 1999, “The Evolution of Emerging Market Credit Spreads in the 1990s,” BIS Quarterly Review (November), pp. 36–44.
Kumar, Manmohan S., and Avinash Persaud, 2002, “Pure Contagion and Investors’ Shifting Risk Appetite: Analytical Issues and Empirical Evidence,” International Finance, Vol. 5, No. 3, pp. 401–36.
Min, Hong G., 1998, “Determinants of Emerging Market Bond Spread: Do Economic Fundamentals Matter?” World Bank Policy Research Paper No. 1899 (Washington: World Bank).
Poterba, James M., and Jürgen von Hagen, 1999, Fiscal Institutions and Fiscal Performance (Chicago: University of Chicago Press).
Zoli, Edda, 2004, “Credit Rationing in Emerging Economies’ Access to Global Capital Markets,” IMF Working Paper No. 04/70 (Washington: International Monetary Fund).
Thanks are due to Teresa Ter-Minassian, Richard Hemming, Fabrizio Balassone, Mark De Broeck, Jiri Jonas, and Paolo Manasse for helpful comments and discussions, to Martin Edmonds and Farhan Hameed for providing some of the data, and to Solita Wakefield for research assistance.
In line with the IMF External Debt Statistics—Guide for Compilers and Users (2003), paragraph 2.31.
Assuming that official creditors do not require a risk premium.
Asia Pacific refers to East and South Asia, while West and Central Asia are included in the Middle East.
The revaluation effect is calculated for year t as
Calculated as nominal GDP minus commodity exports. Note that this estimate is a lower bound because it does not account for revenue-side effects and second-round growth effects in noncommodity sectors.
Demand is also included to account for the mentioned structural shift in asset allocation but is not significant.
This decline in spreads was partly “bought” by holding higher international reserves. This, in turn, has a fiscal cost that might have tended to offset some of the fiscal gains from lower spreads (see Hauner, 2005).
Note that many of the largest commodity exporters have been running fiscal surpluses in recent years. This includes the only three of the 40 countries for which the estimated difference between the fiscal balance over total GDP and over noncommodity GDP was larger than 1 percentage point in 2004 or 2005.
See the Appendix for a discussion of the estimation of future debt flows.
For example, the average forecast published by Consensus Economics in September 2005 implied an increase in the three-month U.S. T-bill rate of 220 basis points by end-2007 compared to the end-2004 level.
This convenient assumption is not unrealistic in the context of emerging market debt: as World Bank (2005) reports, emerging market spreads appear to track movements in short-term U.S. rates more closely than the longer term (10-year) rates, implying that the orientation of investors in the asset class may be driven more by changes in short-term U.S. rates than by longer-term yield considerations.
Depending particularly on the time period studied, some authors found a statistically significant relationship between U.S. short rates and emerging market spreads (e.g., Arora and Cerisola, 2000; Ferrucci, 2003; IMF, 2004a), while others did not (e.g., Kamin and von Kleist, 1999; Min, 1998; Zoli, 2004). As far as it is significant, the empirical evidence suggests an extra 30–70 basis points in the average secondary market spread on emerging market debt for each 100 basis point rise in U.S. short rates.
Based on the Fiscal Transparency Database derived from information in the published fiscal modules of the IMF’s Reports on the Observance of Standards and Codes (ROSC). See IMF (2003) for details.
Based on a cross-section of average spreads in 2005 (first three quarters) on average ratings in 2005 and a constant for the countries included in the analysis here (i.e., without Argentina) with an R-squared of 0.72. While the relationship of ratings and spreads could be nonlinear, it was actually very close to linear in 2005. However, there could still be nonlinearity in the relationship between fiscal transparency and ratings when control variables are taken into account.
Most countries have a sovereign rating, but fewer countries have international bonds outstanding. To include at least all emerging markets that both have had a fiscal ROSC and have international bonds outstanding, we added seven more countries (Estonia, Kazakhstan, Korea, Latvia, Lithuania, Pakistan, and Slovenia) to our original 40 emerging markets; Brazil and the Philippines are outliers when it comes to the relationship between fiscal transparency and spreads and are thus excluded; in sum, we have 20 countries.