## Chapter 3 Summary — Global Shocks, Local Markets: The Changing Landscape of Emerging Market Sovereign Debt

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**Canonical URL:** [Chapter 3 Summary — Global Shocks, Local Markets: The Changing Landscape of Emerging Market Sovereign Debt](https://www.imf.org/-/media/files/publications/gfsr/2025/october/english/ch3sum.pdf)

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### Overview
- Examines evolution of emerging market and developing economies’ (EMDEs’) domestic debt markets and vulnerabilities to global shocks against a backdrop of rising debt levels.
- Notes total EMDE debt "close to $12 trillion excluding China."
- Highlights resilience of many EMDEs and local bond markets to global shocks alongside stark contrasts with EMDEs experiencing significant distress and macro instability.

### Trends in issuance and investor composition
- EMDEs have experienced significant outflows from their domestic local currency bond markets (LCBMs) and financial stress during global shocks like the 2013 “taper tantrum.”
- Two primary funding options for increased debt issuance:
  - Finding more resident buyers for local currency debt.
  - Continuing to rely on foreign-currency-denominated sovereign bond issuance or external loans.
- A select group of major emerging markets has largely relied on local currency issuance increasingly absorbed by domestic investors, particularly non-bank financial institutions, amid higher domestic financial savings.
- Other EMDEs expanded borrowings largely through relatively shorter maturity financing from domestic banks and the central bank and often continue to rely on expensive foreign currency debt.
- Several EMDEs have resorted to domestic debt restructuring because of unsustainable public debt burdens.

### Empirical findings on sensitivity to global shocks
- The chapter estimates effects of global shocks on LCBMs and associations with:
  - Degree of participation by nonresident versus domestic investors.
  - Split between domestic banks and nonbank financial institutions.
- Key empirical results:
  - Presence of more nonresident investors is associated with greater sensitivity of domestic markets to global shocks.
  - Presence of more domestic investors—notably banks—is associated with lower sensitivities.

### Risks and drawbacks of increased domestic absorption
- More resident buyers of local currency debt tend to improve resilience to global shocks, but increased domestic absorption is not universally positive.
- Highlights risk of overborrowing and adverse feedback loops if domestic banks absorb excessive sovereign debt — the sovereign-bank-nexus — potentially leading to large financial stability downsides in cases of debt distress or restructuring.
- Notes potential for financial repression driving domestic demand, with attendant drawbacks.

### Policy guidance for developing resilient LCBMs
- Improving macroeconomic fundamentals remains essential, including raising domestic financial savings and ensuring a stable macro-financial environment.
- Emphasizes need for a strong policy framework and robust financial market systems to channel financial savings into well-functioning local markets.
- Specific foundational actions recommended:
  - Develop foundational market infrastructure.
  - Provide legal certainty.
  - Undertake sustained efforts to deepen the investor base through sound debt management practices and market communication.

*Source: Chapter 3 Summary, "Global Shocks, Local Markets: The Changing Landscape of Emerging Market Sovereign Debt."*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/october/english/ch3sum.pdf_