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Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets

Author/Editor: Baldacci, Emanuele | Gupta, Sanjeev | Mati, Amine
Authorized for Distribution: November 1, 2008
Electronic Access: Free Full Text (PDF file size is 666KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Using a panel of 30 emerging market economies from 1997 to 2007, this paper investigates the determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both fiscal and political factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, while efforts at fiscal consolidation narrow credit spreads, especially in countries that experienced prior defaults. The composition of fiscal policy matters: spending on public investment contributes to lower spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.
 
Series: Working Paper No. 08/259
Subject(s): Emerging markets | Sovereign debt | Credit risk | Fiscal consolidation | Political economy | Fiscal policy | Public investment
Author's keyword(s): Sovereign spreads | political risk | emerging markets | fiscal consolidation
 
English  
    Published:   November 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008259   Pages:   23
    Price:   US$18.00
       
     
Please address any questions about this title to publications@imf.org.