## CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

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### Key findings on EMDE domestic debt markets
- Total government debt among EMDEs has more than doubled over the past decade to nearly $30 trillion (close to $12 trillion excluding China).
- The median debt-to-GDP ratio reached close to 60 percent of GDP.
- Divergence in debt structure:
  - Major emerging markets (a minority of the sample) have more than two-thirds of total government debt in local currency and have avoided large net foreign currency issuance since 2010.
  - Other emerging and frontier markets still rely significantly on foreign currency debt amid less developed local currency bond markets (LCBMs).
- Issuance and investor dynamics:
  - Many emerging markets with strong fundamentals issued domestically in local currency and found new resident buyers amid subdued interest from international buyers.
  - EMDEs with higher shares of local currency debt and more diverse investor bases exhibited more stable bond yields and market liquidity during global stress.
  - Nonresident investor presence is associated with greater sensitivity of domestic markets to global shocks; greater participation by domestic investors—particularly banks—is associated with lower sensitivities.
- Risks from rapid LCBM expansion:
  - Rapid expansion without adequate absorption capacity and strong macro anchors can lead to overreliance on captive investors like banks and central banks, raising financial stability risks and crowding out private credit.
- Restructuring experience:
  - Several EMDEs have resorted to domestic debt restructuring because of unsustainable public debt burdens.

### Policies to address financial vulnerabilities (high-level)
- Enhance macroeconomic fundamentals to increase debt-carrying capacity and attract stable long-term funding:
  - Raise domestic financial savings.
  - Strengthen fiscal and monetary credibility.
- Deepen LCBMs and improve market functioning (proven reforms):
  - Enhance the predictability and transparency of debt issuances.
  - Develop efficient repo and money markets.
  - Strengthen primary dealer frameworks.
  - Diversify the investor base.

### Framework for assessing EMDE sovereign debt markets
- Core interaction: debt absorption capacity (domestic savings and market infrastructure) versus resident share of sovereign debt.
- Two core financial stability objectives for sovereign issuers:
  1. Expand local currency issuance to domestic investors to reduce currency mismatch and risk of capital outflows.
  2. Minimize risks to domestic financial institutions by building a larger and more diverse share of resident buyers able and willing to hold local currency government bonds.
- Four outcomes from absorption capacity × resident share:
  - High absorption capacity + high resident share: insulation from global shocks via asset-liability matching; trade-offs include greater exposure to local shocks and potential crowding out.
  - Low absorption capacity + high resident share: risk of financial repression and sovereign-bank nexus.
  - High absorption capacity + low resident share: potential asset bubbles in other local markets if savings cannot be channelled into debt markets.
  - Low absorption capacity + low resident share: reliance on foreign borrowing and greater vulnerability to sudden stops and debt sustainability risks.
- Policy challenge: move from low/low to high/high without becoming overly reliant on domestic banks while lacking absorption capacity.

### Recent trends and key statistics
- Government debt in EMDEs:
  - Nearly $30 trillion total government debt (close to $12 trillion excluding China).
  - Median debt-to-GDP ratio close to 60 percent of GDP.
- Gross financing needs:
  - Forecast to ease slightly but remain above prepandemic levels for many economies.
- Marketable domestic debt composition:
  - Major EMs issue greater amounts of longer-term local currency bonds.
  - Other EMs and frontier markets issue more short-term securities and rely more on foreign currency bonds, treasury bills, and external marketable instruments.
- Maturity and cost:
  - For major emerging markets, average time to maturity of domestic debt reached seven years in 2024.
  - Emerging markets that issued significant amounts of sukuk had outstanding stocks ranging between 13 and 47 percent of their marketable domestic debt at the end of 2024.
  - Frontier markets like Pakistan had outstanding sukuk equal to 11 percent of marketable domestic debt at the end of 2024.
  - In several economies, the real interest rate on outstanding domestic bonds exceeds projected real GDP growth over the next five years, implying net real carrying costs may impose fiscal burdens.

### Portfolio flows, returns, and investor demand
- Portfolio flows to LCBMs decelerated:
  - Inflows to local currency debt averaged over 1 percent of GDP in aggregate (excluding China) from 2010 to 2014.
  - Inflows were under 0.5 percent of GDP from 2015 to 2024.
- Drivers of weaker flows and returns:
  - Strong dollar and higher US Treasury yields curtailed flows to LCBMs.
  - Total returns on the emerging market local currency bond index were persistently weak over the past decade, primarily undermined by poor currency returns amid a strong dollar cycle.
  - Risk-adjusted returns lagged comparable asset classes such as US high-yield corporate bonds.
- Hard-currency sovereign bonds:
  - Net international sovereign bond issuance continued at a robust pace, with total outstanding debt reaching over $1.4 trillion in 2025.
  - This occurred despite outflows of around 20 percent of assets under management from dedicated emerging market hard currency funds since 2022, suggesting an increased role for crossover investors.

### Investor base composition and domestic absorption
- Nonresident participation:
  - Generally declined from peaks nearly a decade ago and stagnated as a share of GDP in many countries; nonresident holdings remain significant in some markets.
  - The decline reflects significant net issuance combined with tepid inflows rather than large outflows (outside select cases).
- Domestic investor composition:
  - Domestic bank ownership median share close to 30 percent across countries.
  - NBFIs have increased their presence in a number of markets; often composed of long-term buyers such as pension funds and insurance companies.
  - In Brazil, Mexico, and South Africa, mutual and investment funds hold more than 10 percent of government bonds.
- Investor composition by country group:
  - Larger NBFI ownership among major EMs.
  - More banks among other EMs.
  - More “other” ownership among frontier markets.

### Market stress, VIX shocks, and empirical findings
- Local market stress episodes:
  - Heightened stress in 2020 (COVID-19) and early 2022 (rapid rate hikes) as measured by the IMF Local Stress Index.
  - Greater participation by domestic NBFIs coincided with normalization of market functioning during the 2022 episode.
- Regression results on a +10-percentage-point VIX shock:
  - At average nonresident ownership of 22 percent:
    - A 10-percentage-point increase in the VIX is associated with a 19 basis point increase of the five-year local currency yield spread and a 0.7 basis point increase in the bid-ask spread.
  - If nonresident ownership increases by one standard deviation (to 34 percent):
    - Sensitivity rises to 23 basis points for yield spreads and 0.9 basis point for bid-ask spreads for a 10-percentage-point increase in VIX.
  - Resident bank holdings:
    - A one-standard-deviation increase in resident bank ownership from 29 percent to 44 percent reduces sensitivity of yield spreads from 19 to 11 basis points and bid-ask spreads from 0.8 to 0.7 basis points for a 10-percentage-point increase in VIX.
- Economic significance:
  - Average monthly change in emerging market yield spreads ≈ 1.4 basis points.
  - A 4 basis point increase (example with 34 percent nonresident ownership and 10-percentage-point VIX increase) represents nearly three times the typical monthly movement.
  - Average monthly change in bid-ask spreads ≈ 0.02 basis points; an impact of 0.1 to 0.2 basis points is about 5 to 10 times the average movement.
- Nonlinearity and stress periods:
  - Effects are larger during "Stress" periods (VIX above its 75th historical percentile).
  - Amplification (from nonresidents) and attenuation (from residents) are stronger in Stress periods.
- Key statistics and definitions preserved:
  - VIX shock used: +10 percentage points.
  - Stress definition: VIX above its 75th historical percentile.
  - Sample countries: Brazil, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Poland, Romania, South Africa, Thailand, and Türkiye.
  - Average holding shares:
    - Nonresidents = 22 percent (mean); +1 SD to 34 percent.
    - Resident banks = 29 percent (mean); +1 SD to 44 percent.
    - Resident NBFIs = 31 percent (mean); +1 SD to 43 percent.
  - Sample median debt-to-GDP = 47 percent.
  - NBFI asset growth since 2013 = about 11 percent of GDP (equal-weighted average across selected 20 economies).
  - NBFI sovereign debt holdings on average: emerging markets = 22 percent of NBFI assets; frontier markets = 40 percent of NBFI assets.
  - Advanced economy average pension fixed-income allocation = 30 percent.

### Sovereign–bank nexus, simulations, and vulnerabilities
- Sovereign–bank sensitivity:
  - A one-standard-deviation increase in emerging market sovereigns’ implied default probability rate is associated with around half of a standard deviation rise in banks’ expected default frequency during normal stress periods.
  - During extreme stress, the relationship intensifies to near a one-for-one relationship, on average.
- Simulated domestic debt restructuring:
  - Scenario: hypothetical domestic debt restructuring haircuts local currency bond prices by 40 percent.
  - Result: more than half of banking sectors in the sample see regulatory capital ratios fall below the critical 10 percent threshold.
  - Reverse simulation: banking systems with more than 20 percent of assets in domestic government bonds are unlikely to withstand haircuts of 30 percent or more without breaching the 10 percent regulatory threshold.
- Caveats:
  - Simulation focuses on accounting effects and likely underestimates sovereign distress by not considering credit risk amplification, market risk from yield shifts, or liquidity risk from forced sales.
  - Minimum capital ratios vary; the 10 percent threshold assumed may exceed some jurisdictions’ minimums, but declines below it are likely to trigger corrective supervisory action.
- Data sources for simulation: IMF Financial Soundness Indicators and Public Sector–Bank Nexus databases.

### Market structure, infrastructure gaps, and yield patterns
- Yield curve and market structure:
  - Major EMs generally sustain upward-sloping yield curves with moderate positive real yields.
  - Many frontier and smaller EMs record persistently high real yields and steep yield curves.
  - A few economies display flat or negative real yields, reflecting financial repression, shallow investor participation, or credible disinflation.
  - Correlation between yield-curve slope and bank exposure to public sector debt:
    - Frontier markets: –0.34
    - Emerging markets: –0.09
- Money and repo market gaps:
  - Transaction-based reference rates are rarely used as operational targets in many EMDEs, limiting price formation.
  - Repo markets lag advanced economies: collateral availability constrained, high haircuts, legal uncertainties around collateral enforcement and netting, restrictions on short selling, and fragmented settlement infrastructure.
  - Central clearing of repos is present only in a few major emerging markets (Brazil, China, and India).
- Market-making and primary dealers:
  - Benchmark bonds (typically above $1 billion in major EMs) support liquidity and index inclusion.
  - Frontier markets often issue smaller, irregular amounts with mixed transparency and weak auction discipline.
  - PD frameworks in frontier markets prioritize auction participation over secondary market-making and rarely include binding obligations for firm “two-way” quotes.
- Hedging and FMI:
  - Hedging markets (money markets and FX derivatives) materially support participation and resilience; Brazil, Chile, Mexico, and South Africa have fairly balanced hedging markets.
  - Links to international central securities depositories reduce operational and legal barriers.

### Policy-relevant implications and reform priorities (detailed)
- Macroeconomic anchors:
  - Promote credible inflation-targeting frameworks and flexible but credible exchange rate regimes to reduce volatility and support yield-curve development.
- Money-market functioning:
  - Promote transaction-based overnight reference rates and operational targets to strengthen short-end price formation and monetary policy transmission.
- Repo markets and FMI:
  - Address collateral availability and haircut practices; align collateral policies across central bank and interbank repos; improve settlement infrastructure; remove operational limits that hinder collateral circulation.
  - Clarify legal enforceability and netting for repo contracts and collateral.
- Issuance and primary market:
  - Emphasize predictability and transparency; align issuance with monetary operations; consolidate benchmarks and regular liability management operations.
- Primary dealer frameworks and market-making:
  - Tailor PD obligations to market stage: from indicative quotes in frontier markets to firm quoting obligations in major EMs; strengthen PD trading infrastructure and quoting obligations.
- Prudential treatment and sovereign–bank nexus:
  - Gradually reduce incentives for held-to-maturity holdings.
  - Align liquidity coverage requirements with global standards.
  - Remove legal and structural impediments to secondary market trading.
  - Support development of hedging instruments to enable banks to hold more securities in trading books.
- Nonresident participation:
  - Consider gradual, phased opening where financial development is inadequate.
  - Phase out reliance on short-term debt instruments.
  - Improve FX hedging tools to attract longer-term, noncarry-trade flows.
  - Periodic assessments and monitoring of nonresident holdings; consider temporary and narrowly targeted capital flow management measures where macroprudential tools are insufficient (in line with the IMF’s Institutional View).
- Investor base and pension reforms:
  - Mobilize financial savings and develop pension systems (shift from pay-as-you-go to funded systems, mandatory contributions, pooled vehicles).
  - As institutional investors mature, relax mandatory investment requirements and adopt “prudent person rules” to reduce overexposure to government securities.
  - Strengthen legal and regulatory frameworks and adopt a neutral tax regime for collective investment schemes.

### Country case studies and outcomes
- Georgia (joint technical assistance 2018–22):
  - Government debt averaged around 40 percent of GDP between 2018 and 2024.
  - Share of domestic marketable debt increased; tenors extended up to 11 years; foreign exchange debt share lowered from 81 to 70 percent.
  - Benchmark issuance ≈ $1.2 billion in benchmark bonds.
  - Liability management: a 2024 switch operation raised average time to maturity for domestic securities from 2.6 years to 3.5 years (2018–24).
  - Market Makers Pilot Program (2020) improved price discovery; banks remain dominant investors.
- Bangladesh (reforms supported by IMF–World Bank and IMF program conditionality):
  - Reforms included transition to an interest rate–based monetary policy framework, removal of the lending rate cap, elimination of central bank government bond purchases, quarterly issuance calendars, and publication of a daily secondary market yield curve.
  - Linking national savings certificate rates to market yields from 2025; primary dealer guideline reforms in June 2025 removed underwriting obligations and emphasized market making.
  - Outcomes:
    - Nominal stock of marketable bonds doubled between 2019 and 2024.
    - Benchmark bonds exceeded $500 million, securing FTSE Frontier Emerging Market Bond Index inclusion.
    - Reducing the sovereign-bank nexus remains a key challenge.

*Source: CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT (IMF, October 2025).*

### Chapter 3 at a Glance

### Chapter 3 at a Glance

### Key findings on EMDE domestic debt markets
- Amid rising global sovereign debt levels and heightened vulnerabilities to global shocks, the chapter examines changes in emerging market and developing economies’ (EMDEs’) domestic debt markets.
- Total government debt among EMDEs has more than doubled over the past decade to nearly $30 trillion (close to $12 trillion excluding China).
- The median debt-to-GDP ratio reached close to 60 percent of GDP.
- The structure of government debt has increasingly diverged:
  - Major emerging markets (a minority of the sample) have more than two-thirds of total government debt in local currency and have avoided large net foreign currency issuance since 2010.
  - Other emerging and frontier markets still rely significantly on foreign currency debt amid less developed local currency bond markets (LCBMs).
- Many emerging markets with strong fundamentals have been able to issue domestically in local currency and, given subdued interest from international buyers, have found new resident buyers.
- EMDEs with higher shares of local currency debt and more diverse investor bases have exhibited more stable bond yields and market liquidity during periods of global stress.
- EMDEs with weaker policy credibility and shallower pools of domestic financial savings remain reliant on foreign currency borrowing, short-term local currency debt, or less stable funding sources.
- Nonresident investor presence is associated with greater sensitivity of domestic markets to global shocks; greater participation by domestic investors—particularly banks—is associated with lower sensitivities.
- Rapid expansion of LCBMs without adequate absorption capacity and strong monetary and fiscal anchors can lead to overreliance on captive investors like banks and central banks, raising financial stability risks and crowding out private credit.
- Several EMDEs have had to resort to domestic debt restructuring because of unsustainable public debt burdens.

### Policies to address financial vulnerabilities (high-level)
- Enhance macroeconomic fundamentals to increase debt-carrying capacity and attract stable long-term funding:
  - Raise domestic financial savings.
  - Strengthen fiscal and monetary credibility.
- Deepen LCBMs and improve market functioning with proven reforms:
  - Enhance the predictability and transparency of debt issuances.
  - Develop efficient repo and money markets.
  - Strengthen primary dealer frameworks.
  - Diversify the investor base.

### Framework for assessing EMDE sovereign debt markets
- Core interaction: debt absorption capacity (domestic savings and market infrastructure) versus resident share of sovereign debt.
- Two core financial stability objectives for sovereign issuers:
  1. Expand local currency issuance to domestic investors to reduce currency mismatch and risk of capital outflows.
  2. Minimize risks to domestic financial institutions by building a larger and more diverse share of resident buyers able and willing to hold local currency government bonds.
- Four possible outcomes from the interaction of absorption capacity and resident share:
  - High absorption capacity + high resident share: insulation from global shocks via asset-liability matching, but trade-offs include greater exposure to local shocks and potential crowding out.
  - Low absorption capacity + high resident share: risk of financial repression and sovereign-bank nexus.
  - High absorption capacity + low resident share: potential asset bubbles in other local markets if savings cannot be channelled into debt markets.
  - Low absorption capacity + low resident share: reliance on foreign borrowing and greater vulnerability to sudden stops and debt sustainability risks.
- The challenge for many EMDEs is to move from a low/low position to high/high without becoming overly reliant on domestic banks while still lacking absorption capacity.

### Recent trends in EMDE sovereign debt markets
- Government debt in EMDEs has risen sharply since 2010, reaching close to $30 trillion (nearly $12 trillion excluding China).
- Gross financing needs are forecast to ease slightly but remain above prepandemic levels for many economies.
- Major EMs primarily issue in local currency, while many other EMs and frontier markets still rely more on foreign currency issuance.
- Expansion of LCBMs has occurred amid widely varying macroeconomic and institutional conditions, influencing depth and resilience.
- Regarding marketable domestic debt composition:
  - Major EMs are able to issue greater amounts of longer-term local currency bonds.
  - Other EMs and frontier markets issue more short-term securities and rely more on foreign currency bonds, treasury bills, and external marketable instruments.
- Most EMs and frontier markets extended local currency bond maturities, but maturity declined for Other EMs, reflecting cost and absorption constraints.
- Carrying cost of domestic debt portfolios in real terms exceeds projected real growth in several countries.

### Vulnerabilities: limited absorption capacity and the sovereign-bank nexus
- Overreliance on domestic banks to absorb sovereign debt can mask weak underlying absorption capacity and amplify financial stability risks.
- Excessive sovereign exposure for domestic banks increases systemic risk in cases of domestic debt distress or restructuring, potentially transmitting sovereign stress across the economy.
- Domestic debt restructuring can impose disproportionate losses on domestic banks and financial institutions, threatening systemic stability and transmitting sovereign stress across the economy.

### Policy implications for developing resilient LCBMs
- Strengthen macroeconomic fundamentals: raise domestic financial savings and ensure a stable macrofinancial environment.
- Build foundational market infrastructure and legal certainty:
  - Develop money markets, primary markets, and secondary markets.
  - Implement sustained efforts to deepen the investor base through sound debt management practices and market communication.
- Avoid policy steps that result in shallow liquidity, poor price discovery, and excessive reliance on banks and public institutions to absorb government debt.

*Source: Chapter 3 at a Glance, ch3 - Chapter 3 at a Glance (https://www.imf.org/-/media/files/publications/gfsr/2025/october/english/ch3.pdf)*

### 3. Average Time to Maturity for Domestic Debt in Emerging Market and

### ch3 - 3. Average Time to Maturity for Domestic Debt in Emerging Market and

### Maturity profiles and domestic debt composition
- Many major emerging markets have relied on long-term local currency bonds to meet financing needs and have extended maturity profiles over the past 20 years.
- For major emerging markets, the average time to maturity of debt reached seven years in 2024.
- Some major emerging markets compensate investors with inflation-linked or floating-rate instruments; others also use marketable sukuk.
  - Emerging markets that issued significant amounts of sukuk had outstanding stocks ranging between 13 and 47 percent of their marketable domestic debt at the end of 2024.
  - Frontier markets like Pakistan had outstanding sukuk equal to 11 percent of marketable domestic debt at the end of 2024.
- Extending debt maturities in countries with less stable macroeconomic environments and fiscal anchors can lead to rising term premiums, creating trade-offs between funding costs and refinancing risks.
- In several economies, the real interest rate on outstanding domestic bonds exceeds projected real GDP growth over the next five years, implying that the net real carrying cost of domestic debt may impose fiscal burdens in the years ahead.

### Portfolio flows, returns, and investor demand
- Portfolio flows to local currency bond markets (LCBMs) decelerated over the past 10 years:
  - Inflows to local currency debt averaged over 1 percent of GDP in aggregate (excluding China) from 2010 to 2014.
  - Inflows were under 0.5 percent of GDP from 2015 to 2024.
- Drivers of weaker flows and returns:
  - Staff analysis finds a strong dollar and higher US Treasury yields have played significant roles in curbing flows to LCBMs.
  - Total returns on the emerging market local currency bond index have been persistently weak over the past decade, primarily undermined by poor currency returns amid a strong dollar cycle.
  - Risk-adjusted returns have lagged comparable asset classes such as US high-yield corporate bonds.
- Hard-currency sovereign bonds:
  - Net international sovereign bond issuance continued at a robust pace, with total outstanding debt reaching over $1.4 trillion in 2025.
  - This occurred despite outflows of around 20 percent of assets under management from dedicated emerging market hard currency funds since 2022, suggesting an increased role for crossover investors.

### Changes in investor base and domestic absorption
- Nonresident participation has generally declined from peaks reached nearly a decade ago and has stagnated as a share of GDP in many countries, though nonresident holdings remain significant in some markets.
- The decline in nonresident shares generally reflects significant net issuance combined with tepid inflows rather than large outflows (outside select cases).
- Domestic investor composition trends:
  - Domestic bank ownership has been generally steady over time, with a median ownership share close to 30 percent across countries.
  - NBFIs have increased their presence in a number of markets, often composed of long-term buyers such as pension funds and insurance companies.
  - In a limited number of countries (Brazil, Mexico, and South Africa), mutual and investment funds hold more than 10 percent of government bonds.
- Investor composition varies across country groups:
  - Larger NBFI ownership among major EMs.
  - More banks among other EMs.
  - More “other” ownership among frontier markets.

### Market stress, shocks, and the role of investor composition
- Local market stress:
  - LCBMs experienced heightened stress during the COVID-19 pandemic in 2020 and again in early 2022 when many central banks rapidly hiked interest rates, as measured by the IMF Local Stress Index.
  - Greater participation by domestic NBFIs appears to have coincided with normalization of market functioning during the 2022 episode.
- Empirical regression results on global shocks (VIX) and investor composition:
  - A 10-percentage-point increase in the VIX is associated with a 19 basis point increase of the five-year local currency yield spread and a 0.7 basis point increase in the bid-ask spread when nonresident ownership is at the cross-country average level of 22 percent.
  - If nonresident ownership increases by one standard deviation (to 34 percent), sensitivity of yield and bid-ask spreads to a 10-percentage-point increase in VIX rises to 23 basis points and 0.9 basis point, respectively.
  - Resident bank holdings mitigate impacts of VIX shocks:
    - A one-standard-deviation increase in ownership by resident banks from the average of 29 percent to 44 percent is associated with a reduction in the sensitivity of yield spreads from 19 to 11 basis points and in bid-ask spreads from 0.8 to 0.7 basis points for a 10-percentage-point increase in VIX.
- Economic significance of these effects:
  - Given the average monthly change in emerging market yield spreads of approximately 1.4 basis points, a 4 basis point increase in yield spreads—based on a 34 percent nonresident ownership and a 10-percentage-point increase in VIX—represents nearly three times the typical monthly movement.
  - Given the average monthly change in bid-ask spreads of about 0.02 basis points, an impact of 0.1 to 0.2 basis points is about 5 to 10 times the average movement.
- Overall interpretation:
  - Increased nonresident ownership amplifies the transmission of global shocks to local bond markets.
  - Increased resident bank participation (and greater domestic investor presence more generally) is associated with a dampening of those pressures, especially in stress scenarios.

*International Monetary Fund | Chapter 3, Global Financial Stability Report: Shifting Ground Beneath the Calm (October 2025)*

### 1. Effects of 10-Percentage-Point VIX Increase on Five-Year Yield Spreads

### Effects of 10-Percentage-Point VIX Increase on Five-Year Yield Spreads

### Key findings on VIX impact
- A 10-percentage-point increase in the VIX raises local currency five-year yield spreads to US Treasuries and five-year bid-ask spreads; impacts are larger in volatile times and for more indebted economies.
- The effect of a 10-percentage-point VIX increase is substantially larger in "Stress" periods, defined as when the VIX is above its 75th historical percentile.

### Investor composition effects
- Greater nonresident participation:
  - Significantly amplifies the effects of global shocks on local currency bond markets.
  - Is associated with an amplification in both the magnitude and the duration of the spread response.
  - Average nonresident holding share = 22 percent; +1 SD increases share to 34 percent.
- Greater domestic bank participation:
  - Significantly mitigates the effects of global shocks on local currency bond markets.
  - Associated with a dampening in the initial impact and an acceleration in the normalization of spreads.
  - Average resident bank holding share = 29 percent; +1 SD increases share to 44 percent.
- Greater domestic NBFI participation:
  - Does not statistically alter the impact of a VIX shock on yield spreads in the full sample, possibly reflecting heterogeneity among NBFIs.
  - Is associated with an attenuation of the shock’s impact on bid-ask spreads, supporting market liquidity.
  - Average resident NBFI holding share = 31 percent; +1 SD increases share to 43 percent.
- Regional heterogeneity:
  - In some emerging Asia economies (where pension funds and insurers dominate NBFI holdings), increased NBFI participation attenuates VIX shock impacts.
  - In Latin America (notably Brazil and Mexico), where mutual funds play a larger role, larger NBFI presence does not show the same attenuation effect on yield spreads.

### Nonlinearity, stress, and sovereign indebtedness
- Nonlinear effects:
  - Impacts of global volatility on local currency bond markets are larger during high-VIX episodes (above the 75th percentile).
  - Amplification (from nonresidents) and attenuation (from residents) effects are stronger in these Stress periods, particularly for market liquidity.
- Sovereign indebtedness:
  - High government debt economies (debt-to-GDP ratios above the sample median of 47 percent) experience larger volatility:
    - Domestic bank holdings are associated with smaller pass-throughs of global shocks.
    - Nonresident presence is accompanied by larger impacts, but greater nonresident participation is also associated with narrower average yield spreads in these high-debt economies.

### Dynamics over time
- Effects typically peak within one quarter and then gradually recede.
- Larger nonresident shares lengthen and amplify the spread response over time.
- Greater domestic bank participation shortens the duration and accelerates normalization.
- Increased resident NBFI participation durably damps bid-ask spread responses, supporting liquidity.

### Vulnerabilities: absorption capacity and the sovereign-bank nexus
- Resident investors’ absorption capacity:
  - Net local currency government bond issuance continues to grow faster than prepandemic rates in several emerging markets.
  - Rapid issuance can contribute to wider swap spreads and wider local currency bond yields relative to interest rate swap rates.
- NBFI sector and allocations:
  - Financial assets of NBFIs in EMDEs increased by about 11 percent of GDP since 2013 (equal-weighted average across a selection of 20 economies).
  - NBFI presence in frontier markets remains low; frontier markets will likely continue to rely on banks as the main buyers of sovereign debt.
  - On average, NBFIs in emerging and frontier markets hold roughly 22 and 40 percent of their assets in sovereign debt, respectively.
  - Emerging and frontier market pension funds allocate roughly half their assets to fixed-income securities, materially higher than the average advanced economy fixed-income allocation of 30 percent.
- Sovereign-bank nexus:
  - Banks’ government debt holdings as a share of total assets have increased since 2014, coinciding with rapid local currency debt issuance growth.
  - The nexus operates through three channels: direct exposure (banks’ realized losses on government debt), the safety net channel (contingent liabilities from implicit government guarantees), and the macroeconomic channel (weakened fundamentals harming sovereign creditworthiness and banks’ asset quality).
  - Economies with higher debt burdens tend to have greater concentrations of government bonds on banks’ balance sheets.
  - State-owned banks and those with weaker capitalization often increase sovereign exposures the most, potentially eroding capital bases and crowding out private sector credit.
  - Sovereign downgrades often trigger downgrades for domestic banks due to the “country ceiling” constraint applied by rating agencies.

### Key statistics and definitions (preserve source figures exactly)
- VIX shock used: +10 percentage points.
- Stress definition: VIX above its 75th historical percentile.
- Sample countries: Brazil, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Poland, Romania, South Africa, Thailand, and Türkiye.
- Average holding shares:
  - Nonresidents = 22 percent (mean); +1 SD to 34 percent.
  - Resident banks = 29 percent (mean); +1 SD to 44 percent.
  - Resident NBFIs = 31 percent (mean); +1 SD to 43 percent.
- Sample median debt-to-GDP = 47 percent.
- NBFI asset growth since 2013 = about 11 percent of GDP (equal-weighted average across selected 20 economies).
- NBFI sovereign debt holdings on average: emerging markets = 22 percent of NBFI assets; frontier markets = 40 percent of NBFI assets.
- Advanced economy average pension fixed-income allocation = 30 percent.

*Source: IMF staff calculations.*

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### Sovereign–bank nexus: observed links and stress sensitivity
- A one-standard-deviation increase in emerging market sovereigns’ implied default probability rate is associated with around half of a standard deviation rise in banks’ expected default frequency during normal stress periods.
- During periods of extreme stress, the relationship intensifies, reaching near a one-for-one relationship, on average, for emerging markets (Figure 3.10, panel 3).
- Sensitivity estimates are based on sovereign implied default risk from major emerging markets’ five-year credit default swaps and emerging-market bank data covering January 2010 to June 2025 using two-year rolling monthly observations.

### Simulated sovereign distress and banking-sector capital impact
- Scenario: hypothetical domestic debt restructuring that haircuts local currency bond prices by 40 percent (scenario parameters used in Figure 3.10, panel 4).
- Result: more than half of banking sectors in the sample see regulatory capital ratios fall below the critical 10 percent threshold.
- Reverse-simulation finding: banking systems with more than 20 percent of assets in domestic government bonds are unlikely to withstand haircuts of 30 percent or more without breaching the 10 percent regulatory threshold.
- Caveats noted in the analysis:
  - The simulation focuses on accounting effects and likely underestimates the extent of sovereign distress by not considering other amplification channels (credit risk amplification, market risk from yield shifts, or liquidity risk from forced sales).
  - Minimum capital ratios vary between countries, and the 10 percent of risk-weighted assets threshold assumed may exceed the minimum ratio required in some jurisdictions; however, a decline below this threshold is likely to trigger corrective supervisory action.
- Data sources for simulation: ratio of the domestic banking sector’s holdings to domestic government securities, risk-weighted assets, and regulatory capital from the IMF’s Financial Soundness Indicators and Public Sector–Bank Nexus databases.

### Deepening local currency bond markets (LCBMs): framework and application
- Development prerequisites highlighted:
  - Sound macroeconomic fundamentals.
  - Adequate domestic financial savings.
  - Strong policy framework and robust financial market structure to channel savings into a functioning local market.
- Framework: IMF–World Bank Local Currency Bond Market Framework (2021) evaluates four core building blocks—money markets, primary market issuance, secondary markets, investor base—and two supporting blocks—financial market infrastructure (FMI) and legal-regulatory systems—against macroeconomic and institutional enabling conditions.
- Application: the framework is applied to assess market structure in 37 EMDEs with sizable LCBMs, grouping economies as “major emerging markets,” “other emerging markets,” and “frontier markets” based on relative LCBM size and availability of benchmark bonds.
- Limitations: data gaps limit comparability across dimensions, and results may not generalize to EMDEs where macrofinancial or market structures differ materially.

### Heterogeneity across EMDEs: strengths and weaknesses
- Major emerging markets typically:
  - Exhibit stronger economic fundamentals.
  - Have deeper domestic institutional investor bases and lower financial dollarization.
  - Tend to have credible inflation-targeting frameworks and flexible exchange rate regimes that anchor expectations and reduce volatility, aiding yield-curve formation (Figure 3.11, panel 1 and panel 2).
  - Often operate under interest-rate-based monetary policy frameworks with transaction-based overnight reference rates anchoring the short end of the yield curve (Figure 3.11, panel 3).
- Frontier markets typically:
  - Exhibit weaker and more volatile macroeconomic conditions that limit capacity to price risk and sustain demand for long-term local currency bonds.
  - Remain bank dominated with concentrated investor holdings and limited intermediation, increasing risks of financial repression, crowding out private sector credit, and raising financial stability risks.
  - Rely on indicative or administratively set overnight rates with weak links to underlying trades, limiting price formation and monetary transmission.
- Exchange rate and monetary policy channels:
  - In many emerging markets, central banks adjust policy rates to stabilize the exchange rate, directly moving short-term yields.
  - In other economies, expectations of depreciation lift short-term rates through the inflation channel and push up long-term yields through higher currency risk and term premia.
  - Emerging markets more often shaped by the direct policy rate channel; frontier markets more exposed to the risk-premia channel.
  - Both fixed and flexible regimes can support bond-market development if credible; flexible regimes reduce abrupt depreciation risk and generate demand for hedging instruments that can deepen LCBMs.

### Money markets, repo markets, and market infrastructure gaps
- Money-market observations:
  - Achieving reliable reference rates requires transparent computation methodology and provisions for volatile periods.
  - Transaction-based rates are rarely used as operational targets in many EMDEs, limiting price formation and weakening monetary transmission.
- Repo market issues:
  - Deep and liquid repo markets foster interbank and secondary bond market trading, anchor short-term rates, and reduce counterparty risk.
  - Repo markets in EMDEs lag advanced economies in scale and market depth.
  - Key constraints include:
    - Collateral availability limited by high held-to-maturity portfolios.
    - High haircuts and operational limits on collateral circulation that reduce incentives to trade repos.
    - Legal uncertainties around collateral enforcement and netting in several jurisdictions despite adoption of standardized legal documentation (for example, GMRA) and legal opinions in many markets.
    - Restrictions on short selling and fragmented settlement infrastructure further constrain interbank repo potential (Figure 3.11, panel 4).
  - Gaps are larger in frontier markets.

### Market and investor-base indicators
- Short-term real yields and yield-curve observations:
  - Real bond yields in some frontier markets indicate a high-risk premium, signaling underlying stability risks in less-developed LCBMs (Figure 3.11, panel 5).
- Investor base composition (2024, Figure 3.11, panel 6):
  - Fiscal dominance is more pronounced in frontier markets.
  - Sovereign–bank nexus and nonresident exposures are higher in other emerging markets than in peers.
- Data coverage and notes:
  - Panel 1 covers 46 countries: 13 AEs and 33 EMDEs (12 major EMs, 5 other EMs, and 16 FMs).
  - Panel 2 is based on 36 EMDEs (12 major EMs, 7 other EMs, and 17 FMs).
  - Panel 3 sample covers 34 countries (12 major EMs, 7 other EMs, and 15 FMs).
  - Panel 6 covers 29 EMDEs (12 major EMs, 4 other EMs, 13 FMs).
  - FX and inflation volatilities are five-year rolling standard deviations to the end of 2024 unless otherwise noted.

### Policy-relevant implications and areas for reform
- Strengthen macroeconomic anchors:
  - Promote credible inflation-targeting frameworks and flexible but credible exchange rate regimes to reduce volatility and support yield-curve development.
- Improve money-market functioning:
  - Promote transaction-based overnight reference rates and operational targets to strengthen short-end price formation and monetary policy transmission.
- Deepen repo markets and market infrastructure:
  - Address collateral availability and haircut practices, align collateral policies across central bank and interbank repos, improve settlement infrastructure, and remove operational limits that hinder collateral circulation.
  - Clarify legal enforceability and netting for repo contracts and collateral to encourage interbank repo activity.
- Broaden investor base and reduce concentration:
  - Develop domestic institutional investor capacity and instruments (including hedging instruments) to absorb longer-term local currency issuance and reduce reliance on banking-sector holdings.
- Supervision and buffers:
  - Monitor and address sovereign–bank nexus vulnerabilities, especially where banks hold large shares of domestic government debt (for example, systems with more than 20 percent of assets in domestic government bonds).
  - Prepare for corrective supervisory action when capital ratios approach critical thresholds (analysis assumes a 10 percent risk-weighted assets threshold as a trigger for corrective action).

*Source: CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT (PDF).*

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### Market structure and yield curve patterns
- Major emerging markets generally sustain upward-sloping yield curves with moderate positive real yields, consistent with macroeconomic fundamentals, functioning price signals, and broader investor participation.
- Many frontier and smaller emerging markets record persistently high real yields and steep yield curves, often reflecting elevated term premia from inflation uncertainty, debt sustainability concerns, or liquidity and supply constraints.
- A few economies display flat or negative real yields, which may reflect financial repression, shallow investor participation, or credible disinflation episodes that compress term premia.
- The relationship between the slope of yield curve and bank exposure to public sector debt:
  - Correlation for frontier markets: –0.34
  - Correlation for emerging markets: –0.09
  - Interpretation: frontier markets with larger bank holdings of public debt tend to exhibit flatter or inverted yield curves.
- Real rate of returns on pension funds during 2002–22:
  - Negative for 50 percent of frontier markets in the sample of 10 frontier markets.
  - Negative for 6 percent of emerging markets in the sample of 16 emerging markets.

### Sovereign-bank links, investor base, and holdings
- Sovereign-bank links and exposure to nonresident holders are more pronounced in other emerging markets than in major peers, increasing vulnerability to funding shocks, rollover risks, and amplification of sovereign stress through the banking system.
- Major emerging markets have larger NBFI participation, reflecting deeper financial systems and institutional investor bases.
- Pension assets (sample averages, 2024):
  - Pension assets of 21 emerging markets averaged at 17 percent of GDP.
  - Latin American emerging markets averaged 27 percent of GDP.
  - For 11 frontier markets, pension assets stood at 14 percent of GDP.
- Central banks in frontier markets hold a significant share of government securities, reflecting shallow investor bases and potentially indicating elements of fiscal dominance, in addition to high sovereign-bank nexus.
- Where prudential limits on FX positions, caps on outward investment, and few alternative assets prevail, bank portfolios display strong “home bias” and concentration in LCBMs.

### Issuance, primary dealer frameworks, and secondary market liquidity
- Availability of benchmark bonds is critical to forming deep and liquid markets.
- Major emerging markets practices:
  - Predictable issuance, frequent reopening, and regular liability management operations.
  - Benchmark issues typically above $1 billion that support market liquidity and index inclusion.
- Other/emerging and frontier market patterns:
  - Many emerging markets issue in large sizes but with less consistency across tenors.
  - Many frontier markets issue smaller, irregular amounts, with mixed transparency and weak auction discipline.
- Primary dealer (PD) frameworks:
  - In frontier markets, PD frameworks tend to prioritize auction participation over secondary market-making.
  - High auction coverage often above advanced economy norms supports near-term funding but can strengthen the sovereign-bank nexus.
  - PD frameworks rarely include binding obligations for firm “two-way” quotes in the secondary market and often lack supporting infrastructure for PDs, leaving few dealers with active trading books.
- Secondary market liquidity issues:
  - High bid-offer spreads and weak pre- and post-trade price transparency in frontier markets.
  - Wide spreads reflect small trade sizes, lack of benchmark securities, and concentrated buy-and-hold strategies.
  - Some emerging markets (India, Malaysia, and South Africa) exhibit bid-offer spreads comparable with advanced economies, but liquidity is often concentrated in a few benchmark bonds.
- Market-making and global banks:
  - PDs in most emerging markets include large global banks, which broaden market access, introduce high-frequency trading strategies, contribute to market liquidity, and potentially narrow bid-ask spreads, but can also amplify sensitivity during stress.

### Market infrastructure, hedging, and access for nonresidents
- Supporting infrastructure shapes investor participation and resilience:
  - Hedging markets supported by well-functioning money markets enable investors to manage interest rate and exchange rate risk, lifting participation and liquidity.
  - Emerging markets with deeper hedging markets have withstood liquidity shocks better (BIS 2024).
  - FX derivatives are generally more prevalent in emerging markets; Brazil, Chile, Mexico, and South Africa among those with fairly balanced hedging markets.
- Links to international central securities depositories provide secure, standardized, cross-border access to domestic securities, reducing operational and legal barriers.
- Financial market infrastructure (FMI) status:
  - Most emerging markets have sound FMI in place, but FMI in frontier markets remains uneven and operational gaps can amplify liquidity pressures and raise risk premia.
  - Central clearing of repos is present only in a few major emerging markets (Brazil, China, and India have implemented a central clearing counterparty for clearing of repos).

### Policy recommendations and reform priorities
- Strengthening LCBMs is crucial to reducing sovereign debt vulnerabilities and enhancing financial resilience, alongside macroeconomic and fiscal stability.
- Caution: rapid LCBM expansion that outpaces investor demand can increase term premia, destabilize debt dynamics, and increase financial stability risks.
- Priorities:
  - Prioritize macroeconomic stability and strong fiscal anchors to safeguard public debt sustainability.
  - Mobilize adequate financial savings and channel them into LCBMs to strengthen absorption capacity.
  - Develop the domestic institutional investor base as part of broader financial sector development.
    - Pension system design: shifts from pay-as-you-go to funded systems (including mandatory contributions to privately managed plans or provident funds) can support LCBM development.
    - Additional instruments: pension-like insurance products, tax incentives for voluntary pensions, life insurance products.
    - As institutional investor base matures, gradually relax mandatory investment requirements and adopt “prudent person rules” to reduce overexposure to government securities.
    - Strengthen legal and regulatory frameworks and adopt a neutral tax regime for collective investment schemes to protect investors.
  - Deepen market liquidity to improve monetary transmission, reduce currency mismatches, and mitigate capital flow volatility; integrate LCBM reforms into IMF and World Bank capacity development and surveillance.
- Key building blocks and specific steps:
  a. Sound monetary policy frameworks and deeper money markets:
    - FMs should adopt and operationalize interest rate–based frameworks using credible policy instruments and transaction-based reference rates.
    - Develop repo markets; expand collateral reuse and term repos; facilitate access to NBFIs.
    - Mitigate systemic risks from repo markets with consistent haircuts and margin requirements, enhanced transparency, and other risk management controls.
  b. Issuance strategies:
    - Emphasize predictability and transparency to sustain demand and build benchmark bonds.
    - Align issuance with monetary operations to stabilize systemic liquidity and reduce issuance volatility.
    - Frontier markets should focus on a limited set of standardized benchmarks; emerging markets should consolidate liquidity through greater reopenings and regular liability management operations.
  c. Primary dealer frameworks and trading infrastructure:
    - Strengthen PD frameworks and trading infrastructure to support market liquidity and secondary market functioning (Adrian, Fleming, and Nikolaou 2025).

### Table 3.1 — Policy focus by country group (summary)
- Major emerging markets:
  - Primary market focus: Consolidate benchmark issuance to reduce fragmentation.
  - Investor strategy: Deepen institutional investor base by promoting long-term savings institutions.
  - Money and secondary market: Expand use of interbank repos and encourage larger trading books for primary dealers and banks; establish central clearing counterparties where appropriate.
- Other emerging markets:
  - Primary market focus: Accelerate benchmark bond issuance and initiate regular liability management operations.
  - Investor strategy: Develop domestic institutional investor base to deepen local currency issuance.
  - Money and secondary market: Improve the primary dealer framework; encourage use of repo contracts based on internationally recognized master agreements.
- Frontier markets:
  - Primary market focus: Build benchmark bonds, establish issuance rules and auction discipline, and facilitate greater coordination with monetary operation; strengthen government cash management.
  - Investor strategy: Reduce overreliance on banks and nurture nascent institutional investors.
  - Money and secondary market: Implement interest rate–based monetary policy and encourage use of money market reference rates and repos.

*CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT*

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT

### Strengthening primary dealer frameworks and market-making obligations
- PD (primary dealer) obligations should be balanced and tailored to the stage of market development, from indicative quotes in frontier markets to firm quoting obligations in major emerging markets.
- In frontier markets, PD frameworks must balance privileges with obligations.
- In major emerging markets, emphasis should shift to enforcing quoting obligations and participation thresholds for PDs.

### Market micro-structure and systemic safeguards
- Improve trading activity in less liquid markets through implementation of electronic interdealer trading platforms.
- Enhance market transparency through publication of reliable yield curves and better dissemination of pre- and post-trade information.
- In major emerging markets where repo activity has grown significantly, more robust clearing arrangements may be required.
- Establishment of central clearing counterparty could reduce counterparty risks and dealer balance sheet strain (Adrian, Nikolaou, and Wu 2025).

### Prudential treatment of sovereign bonds and reducing the sovereign-bank nexus
- Prudential treatment should avoid reinforcing the sovereign-bank nexus by:
  - Gradually reducing incentives for held-to-maturity holdings.
  - Aligning liquidity coverage requirements with global standards.
  - Removing legal and structural impediments to secondary market trading of government securities.
  - Supporting development of hedging instruments to enable banks to hold more securities in trading books and improve market liquidity.

### Domestic sovereign issuance and restructuring provisions
- Domestic sovereign issuance should incorporate sound contractual provisions for debt restructurings.
- For economies at a nascent stage of LCBM development, domestic bonds can include provisions relating to the negotiation process and restructuring mechanics to facilitate orderly and predictable resolution if restructuring becomes necessary.

### Investor base diversification and financial sector development
- Investor base diversification should be a long-term priority and contingent upon broader financial sector development supported by coherent financial sector policies.
- Policy measures to expand institutional investor base:
  - Pension reforms and greater penetration of the life insurance sector.
  - Align investment mandates, solvency rules, and tax treatment to enhance institutional investor demand in frontier markets over the medium term.
  - Clear and regular issuance communication to help anchor investor expectations.
  - Large emerging markets can build on pension reforms and promote pooled investment vehicles like mutual funds and voluntary pensions.

### Nonresident participation in local currency bond markets (LCBMs)
- The appropriate degree of nonresident participation is difficult to establish; both benefits and risks must be considered.
- Where financial development is inadequate and FX and money markets are shallow and macroeconomic stability is weak, a gradual and phased approach to opening participation of foreign investment in the LCBM may be useful.
- Reliance on short-term debt instruments should be phased out because they can increase rollover risks and amplify volatility during stress, particularly when they offer high real yields.
- Improving FX hedging tools in emerging markets can attract longer-term, noncarry-trade flows, mitigating capital outflows.
- Managing high nonresident participation requires strong institutions and appropriate FMI systems to support systematic monitoring of nonresident holdings and flows.
- Periodic assessments of risks associated with nonresident holdings are important for formulating appropriate policy responses and building buffers.
- As an exception, where macroeconomic and prudential tools are insufficient, temporary and narrowly targeted capital flow management measures may need to be considered in line with the IMF’s Institutional View (IMF 2012) to reduce excessive vulnerabilities with nonresident flows.

### Emerging market corporate debt trends and investor behavior
- Aggregation of deal-level data for EMDE (excluding China) corporate bonds and loans shows issuance declined significantly from 2022 through the third quarter of 2024, after the postpandemic surge in 2021 waned.
- Bonds comprise around 80 percent of emerging market corporate debt issuance, having outgrown loans since the global financial crisis.
- The local currency share of emerging market corporate debt (by volume) increased from 34 percent in 2021 to almost 45 percent in the third quarter of 2024.
- Corporations from emerging Asia were especially active in issuing local currency bonds; on a volume basis, Malaysian and Thai corporations have almost exclusively issued bonds in local currency in the 2022 to 2024 period.
- Similar trends are observed qualitatively for corporate loans, though growth of local currency loans may be attenuated by EMDE corporations bolstering borrowing relationships with banks headquartered in foreign jurisdictions that prefer foreign currency loans.
- Domestic investors entered emerging market corporate debt markets during past crises: following the onsets of the global financial crisis and the pandemic, domestic investors increased their holdings of EMDEs’ corporate loans while nonresident investors retraced their holdings.
- Higher domestic investor shares in EMDE sovereign bonds attenuate the adverse impacts of global shocks.

### Case study — Georgia: deepening local currency bond market and mitigating sovereign debt portfolio risks
- Joint programmatic technical assistance on debt management (2018–22) supported Georgia, a highly dollarized economy, to deepen its domestic bond market and reduce foreign exchange risk.
- Government debt averaged around 40 percent of GDP between 2018 and 2024.
- The share of domestic marketable debt increased with tenors extending up to 11 years, lowering the foreign exchange debt share from 81 to 70 percent.
- Market development actions:
  - Benchmark issuance underpinned market growth (approximately $1.2 billion in benchmark bonds).
  - Liability management operations, including a 2024 switch operation, raised the average time to maturity for domestic securities from 2.6 years to 3.5 years (2018–24).
  - A 2021 Eurobond ensured refinancing and preserved international market access.
  - The Market Makers Pilot Program launched in 2020 improved price discovery on benchmark bonds, though banks remain dominant investors.
  - Transparency enhancements aim to attract more nonbank and foreign investors; diversification remains a priority.

### Case study — Bangladesh: laying foundations for a robust LCBM
- Facing higher financing needs and falling concessional flows, Bangladesh prioritized local currency bond market development.
- A joint IMF–World Bank local currency bond market diagnostic mission in 2023 identified major distortions: interest rate caps, central bank participation in auctions, and reliance on costly nonmarketable domestic debt in the form of national savings certificates.
- Foundational reforms supported by IMF program conditionality included:
  - Transition to an interest rate–based monetary policy framework.
  - Removal of the lending rate cap.
  - Elimination of central bank government bond purchases.
  - Quarterly issuance calendars.
  - Publication of a daily secondary market yield curve.
  - Expanded access through over-the-counter and stock exchange trading.
  - Linking national savings certificate rates to market yields from 2025 to reduce market fragmentation.
  - Follow-up technical assistance guided reforms on primary dealer framework guidelines in June 2025, removing underwriting obligations and emphasizing market making activities by primary dealers.
- Outcomes:
  - The nominal stock of marketable bonds doubled between 2019 and 2024.
  - Benchmark bonds exceeded $500 million, securing FTSE Frontier Emerging Market Bond Index inclusion.
  - Reducing the sovereign-bank nexus remains a key challenge.

*Source: CHAPTER 3 GLOBAL ShOCkS, LOCAL MARkETS: ThE ChANGING LANdSCAPE OF EMERGING MARkET SOvEREIGN dEBT (IMF, October 2025).*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/october/english/ch3.pdf_