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Affiliations: IMF and MoFiR (Presbitero), IMF (Ghura, Adedeji, Njie). This paper is part of a research project on macroeconomic policy in low-income countries supported by the UK’s Department for International Development. We thank Camelia Minoiu for providing data on syndicated loans, and Tamon Asonuma, Jana Gieck, Anastasia Guscina, Sean Nolan, Priscilla Muthoora and seminar participants at the IMF for comments on an earlier draft.
The definition of income groups follows the IMF World Economic Outlook (WEO), which distinguishes advanced economies (AEs) and emerging market and developing economies (EDMEs). Low income developing countries (LIDCS)—60 countries in all—are a sub-group of lower income EMDEs, defined in IMF (2014). Frontier markets—14 countries in all—are LIDCs that have some degree of access to international capital markets (see IMF (2014) for further discussion).
According to the 2015 OECD DAC bilateral aid (excluding debt relief) to the least-developed countries fell by 8 percent in 2014. See OECD at: http://www.oecd.org/development/development-aid-stable-in-2014-but-flows-to-poorest-countries-still-falling.htm
See Eaton and Taylor (1986) and Eaton (1993) for an overview of the literature.
This paper builds on the literature that identifies the determinants of EMDEs’ sovereign bond spreads in both primary (Kamin and von Kleist, 1999) and secondary markets (Bellas and others, 2010; Rocha and Moreira, 2010; Baldacci and others, 2011; Siklos, 2011; Comelli, 2012; Kennedy and Palerm, 2014; Csontó, 2014; Guscina and others, 2014). These papers generally show that global risk aversion, macroeconomic fundamentals (especially the fiscal stance) and political risk are significantly correlated with interest rate spreads.
Government effectiveness, published in the World Bank’s Worldwide Governance Indicators, captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies (Kaufmann and others, 2010)).
See Table 2 for countries used in the sample, including those that issued international bonds. Three countries that issued during the sample period are excluded due to lack of data (Iraq, Serbia and Montenegro).
The adoption of this threshold implies the exclusion from the sample of some richer countries (Antigua & Barbuda, The Bahamas, Bahrain, Brunei, Kuwait, Oman, Qatar, Seychelles and UAE).
Private placements are excluded. In the recent LIDC experience, only Tanzania issued a US$ 600 million floating rate note in 2013 via a private placement. For a discussion of government securities and corporate bond markets (see Mu and others, 2013).
The increase in syndicated loans in 2008 and 2009 was due to large borrowing from countries in Europe (e.g., Hungary, Poland, and Ukraine).
Limited and non-random data availability on prices of syndicated loans prevent an extension of our analysis to the issuance and price of syndicated loans (see Cerutti and others 2014 for a discussion of data issues).
Throughout the paper, we use a standard terminology and consider a country as having market access or not only on the ground of bond issuance (Grigorian, 2003; Gelos and others, 2011). We acknowledge that this is a simplification, as access to markets depends also on the amounts issued relative to funding needs, tenor, currency of denomination and interest rate against benchmarks.
The main results are not affected when these observations are trimmed (i.e., set to missing values) rather than winsorized (i.e., extreme values are set equal to the 1st and 99th percentiles).
Vietnam issued in 2005, Ghana and the Republic of Congo were the first African countries to issue sovereign bonds in 2007, while Senegal issued in 2009, Côte d’Ivoire in 2010, Nigeria in 2011, Bolivia, Zambia and Mongolia in 2012, and Honduras, Rwanda and Tanzania in 2013.
Adjusting the threshold to 10 issuances rather than 5 does not alter the results. In that case, the 7 regular access countries are Brazil, Croatia, Hungary, Jamaica, Lithuania, Poland, and Ukraine.
The CBOE Volatility Index (VIX), computed and disseminated by the Chicago Board Options Exchange, is a measure of market expectations of near-term volatility conveyed by S&P500 stock index option prices.
If a sovereign issues more than one bond in a given year, the variable SPREAD measures the (unweighted) average of the spreads of all bonds issued in that year.
As the literature identifies a number of determinants of market access and bond spreads, the set of explanatory variables used considers the trade-off between the inclusion of the most relevant determinants of market access and the reduction in the number of observations due to the inclusion of too many variables.
For East Asia and Pacific, Europe and Central Asia, Latin America and Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa.
Inclusion of population in the outcome equation (2) confirms that country size is not correlated with primary spreads.
The Wald test rejects the null hypothesis that the error terms in the two equations are orthogonal.
This sort of sample selection effect is consistent with the early literature on emerging markets’ bond spreads, when Fed tightening was associated with a narrowing, not widening, of bond spreads. One explanation is that initial market offerings during periods of Fed tightening, which were associated with turbulent market conditions, were only possible for the more creditworthy countries (Arora and Cerisola, 2001). Supply-side factors could be at play as well: with low yields, investors could look beyond the traditional markets and venture out in more risky frontiers markets, looking for higher spreads. The fact that the negative coefficient on US rates is not statistically significant when we exclude the period 2008-2013 (results not reported) suggests that the supply-side effects may have dominated in the last period of global low interest rates.
This finding is consistent with that of Guscina and others (2014) with first-time bond issuances trading at higher spreads, even after controlling for a standard set of macroeconomic and institutional variables.
The inclusion of government effectiveness comes at the non-trivial cost of reducing the sample size.