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### I. Introduction and motivation
- Emerging markets (EMs) improved public debt issuance practices over the last decade:
  - extended the maturity of their debt profile,
  - cut down issuance of floating rate debt,
  - reduced foreign-currency debt (Anderson et al. 2010).
- These supply-side improvements, together with reduced levels of public debt, increased resilience to exchange rate and interest rate shocks.
- Rising foreign participation in EM government debt creates:
  - Opportunities: reduce borrowing costs and spread risks more broadly among investors.
  - Risks: raise external funding risks for the government (demand-side risks), less under the control of public debt managers when debt is freely traded.
- Example: EM local bond markets experienced foreign outflows and bond yields rose sharply after Chairman Bernanke’s May 2013 remarks about tapering.

### II. Dataset constructed and methodological framework
- Coverage and scope:
  - Sample covers 24 emerging markets, covering US$ 9 trillion of government debt and US$ 1 trillion of debt securities held by foreigners as of end-2012.
  - Countries include 14 of the 15 in JPMorgan GBI-EM and 23 in JPMorgan EMBI; country-weight coverage: 99 percent of GBI-EM Global by country weights and nearly 80 percent of EMBI Global as of end-2012.
  - Time frequency: quarterly, covering 2004 to mid-2013.
- Debt and investor definitions:
  - Debt definition: general government gross debt (central government, state and local governments, and social security funds where applicable); includes securities and loans; excludes arrears, financial derivatives, guaranteed debt, or other contingent liabilities; gross basis.
  - Investor classes decomposed: domestic banks; domestic nonbanks; domestic central bank; foreign banks; foreign nonbanks; foreign official sector.
    - Banks = depository institutions other than central banks.
    - Nonbanks = insurance companies, pension funds, investment funds (mutual funds, ETFs, SWFs).
    - Foreign official sector includes official loans and foreign central bank holdings of EM government debt as reserve assets.
- Data sources and harmonization:
  - Primary international sources: Eurostat QPSD, GFS, IMF QEDS, BIS International Banking Statistics, IFS, COFER, CPIS, national sources.
  - Guiding principle: holdings represent outright ownership; pledged/collateralized debt not counted as a transfer of ownership.
  - Valuation practice: compiled at face value or, where QEDS reports market value (Latvia, Lithuania, Poland, Hungary post-2008, South Africa, Thailand), converted to face value using national data ratios.
  - For countries where QEDS lacks foreign holdings of locally-issued government debt (Brazil, China, Colombia, Egypt, Malaysia, Peru, Philippines, Turkey), QEDS supplemented with national sources (Tesouro Nacional, ChinaBond, Ministry of Finance and Public Credit of Colombia, Central Bank of Egypt, Bank Negara Malaysia, Central Reserve Bank of Peru, Turkish Undersecretariat of Treasury).
  - Historical gaps for Bulgaria, Egypt, India, Indonesia, Philippines, Romania filled from national sources aligned with later QEDS series.
- Construction of foreign holdings:
  - Foreign holdings = QEDS general government securities held externally (money market instruments; bonds and notes) + general government loans held externally.
  - For countries reporting market values in QEDS, national market/face ratios used to convert to face value.
  - For the Philippines, foreign holdings of locally-issued government debt inferred from balance of payments (“portfolio liabilities of general government”).

### III. Key empirical findings and stylized facts
- Scale and composition of foreign holdings (end-2012):
  - Total foreign holdings: about US$1 trillion of EM government debt (excluding foreign official loans).
  - Foreign nonbanks (asset managers): about US$800 billion, or about 80 percent of total foreign holdings (excluding foreign official loans).
  - Foreign central banks: estimate about US$40-80 billion of EM government debt securities as of end-2012 (out of US$1 trillion total foreign holdings); concentrated in Brazil, China, Indonesia, Malaysia, Mexico, Poland, and South Africa.
  - Average foreign share in EM sovereign debt markets: 24 percent at end-2012 (more than 10 percentage points lower than average foreign participation rate in advanced economies).
- Dynamics across three periods:
  - Before the GFC (2006–08): moderate differentiation across countries; some countries retired external bonds (Poland, Thailand, Peru) reducing foreign holdings; India and Egypt saw gradual increases.
  - During the GFC (2008–09): foreign investors reduced holdings of EM government debt by about US$ 40 billion; EMEA largest outflows; foreign ownership declined from about 35 percent to 27 percent for EU countries and from over 20 percent to about 15 percent for non-EU countries; Asia saw very little outflows except Malaysia (nearly 10 percentage point fall); Ukraine’s foreign participation fell from 50 to 20 percent within a year.
  - After the GFC (2010–12): large across-the-board foreign inflows—about half a trillion dollars of foreign investment went into EM government debt during 2010–12, mostly from foreign asset managers; about half of the US$1 trillion of foreign holdings were accumulated during 2010–12.
- Foreign banks and foreign official loans:
  - Share of foreign banks in total foreign holdings has been declining steadily.
  - Foreign official loans remain important for some countries (Bulgaria, Romania, and Ukraine) but less so for others (Indonesia, Russia, and South Africa).
- Credit ratings and inclusion in global indices:
  - One-third of the sample reached investor grade status (BBB- or higher) during 2005–12 (examples: Brazil, Bulgaria, Colombia, Indonesia, Peru, Romania, Russia, Uruguay).
  - Four EMs included in Citibank WGBI: Poland, Malaysia, Mexico, and South Africa.
  - Reserve managers’ minimum credit rating commonly “single-A”; seven EMs satisfied this for local currency bonds as of end-2012: Brazil, Chile, China, Malaysia, Mexico, Poland, and South Africa (Chile noted as small market).

### IV. Measurement of flows, country-of-origin, and robustness
- Foreign flows decomposition and exchange-rate adjustment:
  - Changes in foreign holdings attributable to transactions, price revaluations, exchange rate changes, or statistical reclassifications.
  - Flow_t formula: Flow_t = (FC Debt_t − FC Debt_t−1) * ε_t + (LC Debt_t − LC Debt_t−1)
    - Flow_t: Foreign flow (denominated in local currency) during t.
    - FC Debt_t: Foreign holdings of foreign-currency debt securities (denominated in U.S. dollars) at end-t.
    - LC Debt_t: Foreign holdings of local currency debt securities (denominated in local currency) at end-t.
    - ε_t: Average exchange rate against the U.S. dollar during t.
  - Price revaluations addressed via face-value compilation.
- Investor-country-of-origin:
  - Uses CPIS database on portfolio holdings with assumption that country of origin of foreign investors for government debt is similar to that for other securities in that country.
  - Examples: Hungary largely held within the euro area; Philippines held more broadly including outside Asia.
  - Limitations: custodial holdings and immediate-borrower basis can misattribute ultimate investor origin.
- Robustness checks and limitations:
  - For about half the sample, estimates align with national data despite comparability challenges.
  - Consistency checks: foreign central bank holdings ≤ total foreign holdings; foreign bank holdings ≤ (total foreign holdings − foreign official holdings). Exceptions for Bulgaria, Chile, India, Romania, and Thailand led to alternative measures.
  - Foreign central bank holdings may be understated if reserve-asset reporting excludes some securities (CPIS/COFER-based estimate ≈ $40 billion; adding unrecorded securities could raise to ≈ US$80 billion or 8 percent of total foreign holdings).
  - Foreign nonbanks and domestic nonbanks are imputed residuals and may include measurement errors; foreign nonbanks may include holdings by banks resident in non-reporting countries (e.g., China, Russia), likely a small share.

### V. Sovereign Funding Shock Scenarios (FSS) — methodology and illustrative scenarios
- Objective:
  - Assess potential impact of sudden foreign outflows on domestic bond yields and sovereign-bank linkages over a one-year horizon.
  - Shock trigger: foreign private investors stop rolling over their holdings or pull out over one year.
- Behavioral assumptions:
  - Domestic nonbanks remain “stable buyers” based on average net purchase over the last three years (ranges between 0-3 percent of GDP for most countries).
  - Domestic banks act as “swing buyers.”
  - Foreign official lenders and domestic central bank act as “lenders of last resort.”
- Key parameters governing foreign investor actions:
  - α: contribution to funding of overall fiscal deficit over the next year.
  - β: rollover of short-term government debt holdings by residual maturity.
  - γ: sale of long-term government debt holdings by residual maturity.
  - Interpretation:
    - α determines contribution to net financing needs.
    - α and β together determine contribution to gross financing needs.
    - γ determines additional liquidation beyond gross financing needs.
- Accounting decomposition (selected formulas as in source):
  - GFN_t = D_t + M_t = FD_t + OD_t + FM_t + OM_t
  - FD_t = D_t * FS_t / TS_t
  - FM_t = M_t * FS_t / TS_t
  - Foreign Outflows = (1−β) FM_t + γ(FS_t − FM_t)
  - Additional Debt = D_t (1−α) + Foreign Outflows − Debt take up by domestic nonbanks
  - Bank Holding of Own Government Debt = DBS_t + Additional Debt
- Scenario parameterization used in paper:
  - α = 0 in all scenarios.
  - β = 0 in Scenario 1; β = 50 percent in Scenarios 2 and 3.
  - γ = 0 except in Scenario 3 where γ = 30 percent.
- Illustrative scenario outcomes:
  - Scenario 1 (β = 0, α = 0, γ = 0): most countries resilient; only Egypt, Lithuania, and Poland require domestic bank purchases >3 percent of bank assets.
  - Scenario 2 (β = 50 percent, α = 0, γ = 0): additional sensitivity—Argentina, Hungary, Mexico, and Ukraine may become sensitive alongside Egypt, Lithuania, and Poland.
  - Scenario 3 (β = 50 percent, α = 0, γ = 30 percent): active sale extends vulnerability to Indonesia, South Africa, Turkey, Uruguay, and others; domestic banks in these countries may have to re-allocate more than 3 percent of assets to government debt in a single year.
- Historical consistency:
  - Pressure in summer 2013 broadly in line with illustrative analysis; eight of the ten countries with the largest rise in long-term local-currency bond yields were among those identified as sensitive.
- Role of maturity and buffers:
  - Countries with high liquidity buffers (e.g., Mexico and Poland) experienced less market impact despite higher shares of foreign holdings.
  - Uruguay noted for very high average debt maturity and large liquidity buffers (deposits could cover around 3 years of central government debt amortization and contingent credit lines worth $1.4 billion as of end-2012).

### VI. Foreign Investor Position Index (FIPI)
- Purpose: track foreign investors’ positions relative to a global benchmark (JPMorgan GBI-EM Global) to infer active overweight/underweight positions.
- Construction:
  - FIPI_i = F_i / Σ F_i_Ni − D_i / Σ D_i_Ni
    - Interpretation: FIPI_i < 0 → Underweight; FIPI_i > 0 → Overweight.
    - F_i = foreign investor holding of country i’s government debt in local currency.
    - D_i = outstanding government debt of country i included in JPMorgan GBI-EM Global (excluding Nigeria).
- End-June 2013 signals:
  - Foreign institutional investors overweight Mexico, Turkey, and Philippines.
  - Foreign institutional investors underweight Russia, South Africa, and Thailand.
  - Mexico overweight by five percentage points relative to GBI-EM Global country weight.

### VII. Policy implications and recommendations
- Mitigating external funding shocks and sovereign-bank linkages:
  - Extend the maturity of government debt.
  - Develop a domestic investor base to reduce reliance on foreign private investors.
  - Maintain ample liquidity buffers (government deposits, contingent credit lines).
  - Pay special attention to investor relations, particularly with foreign investors.
- Monitoring and management:
  - Track investor base composition and diversity to assess market liquidity, risk sharing, and suitability of liability management operations.
  - Monitor concentration of holdings in domestic banks to limit sovereign-bank interdependence risks.
- Institutional tools:
  - IMF Flexible Credit Line (FCL) access noted for Colombia, Poland, and Mexico as relevant.

*Source: wpiea2014039-print-pdf (IMF working paper).*

### References..............................................................................................................

### wpiea2014039-print-pdf - References..............................................................................................................

### I. Introduction
- Over the last decade, emerging markets (EMs) have made significant improvements in public debt management, reducing a number of risks associated with how they issue debt (“supply-side risks”).
- Specific supply-side improvements cited:
  - extended the maturity of their debt profile,
  - cut down issuance of floating rate debt,
  - reduced foreign-currency debt (Anderson et al. 2010).
- These improvements, along with reduced levels of public debt, have made public sector balance sheets more resilient to shocks, including exchange rate and interest rate shocks.
- Foreign interest in EM government debt rose sharply in recent years.
- Rising foreign participation creates opportunities and risks (“demand-side risks”):
  - Opportunities: can help reduce borrowing costs and spread risks more broadly among investors.
  - Risks: can raise external funding risks for the government; example: EM local bond markets experienced foreign outflows and bond yields rose sharply after Chairman Bernanke’s remarks in May 2013 regarding tapering of asset purchases.
- Demand-side risks relate to who holds the debt rather than how it is issued and are less under the control of public debt managers when government debt is freely traded in secondary markets.

### II. Need for comparable investor-base data
- Importance:
  - Tracking the investor base for government debt is important, especially from an international perspective.
  - A cross-country view is essential for understanding global demand dynamics, since changes in country allocations of international investors affect many countries at once.
  - Internationally comparable data allow aggregation of investor flows across countries to examine changes in asset allocation of international investors.
- Current data challenges:
  - Investor base data from national sources are not always comprehensive or comparable.
  - Flow of funds data are not usually available for emerging markets.
  - Data from private sector vendors (e.g., survey or custodial data) cover only part of the investor base, though they have merits such as shorter reporting lags.

### III. Dataset constructed in the paper
- Characteristics of the emerging markets dataset:
  - Uses a common definition of debt: general government gross debt.
  - Uses a common estimation methodology to ensure cross-country comparability based on harmonized international data sources.
  - All data are compiled either at face value or, in a few instances, adjusted for valuation changes — this allows for tracking investor transactions as well as holdings.
  - Foreign investor holdings are estimated separately for:
    - the foreign official sector,
    - foreign banks,
    - foreign nonbanks.
    - (This contrasts with national data sources that usually classify them under one category, “rest of the world”.)
  - The dataset covers 24 countries that make up most of the investable universe of EM government debt, providing a comprehensive view of global demand for sovereign debt of emerging markets.
- Additional dataset features:
  - Separately, the emerging markets dataset includes data on foreign holdings of government debt in local currency.
  - The dataset follows the same approach previously taken for advanced economies.

### IV. Stylized facts and key finding preview
- Based on the dataset, one stylized fact highlighted:
  - About half a trillion dollars of foreign flows went into EM government debt during 2010–12, mostly coming from foreign asset managers (Figure 5).

_Italic: Source: wpiea2014039-print-pdf - References.............................................................................................................._

### Annex Figure 3). Second, we find that foreign central banks are playing a greater role in EM

### wpiea2014039-print-pdf - Annex Figure 3). Second, we find that foreign central banks are playing a greater role in EM

### Key findings and trends
- Foreign central banks hold about US$40-80 billion of EM government debt securities as of end-2012 (out of a total of US$1 trillion foreign holdings).
- Foreign central bank holdings appear concentrated in: Brazil, China, Indonesia, Poland, Malaysia, Mexico, and South Africa.
- Foreign flows to emerging markets were less differentiated during 2010–12 against the background of near-zero interest rates in advanced economies.
- As of end-2012, the sample covers US$ 9 trillion of government debt and US$ 1 trillion of debt securities held by foreigners.
- Sample coverage: 24 emerging markets, covering 14 of the 15 countries included in JPMorgan’s local-currency emerging market government bond index (JPMorgan GBI-EM) and 23 countries included in the foreign-currency bond index (JPMorgan EMBI).
- Country-weight coverage: These countries account for 99 percent of the JPMorgan GBI-EM Global index by country weights and nearly 80 percent of the JPMorgan EMBI Global index, as of end-2012.

### Motivation: why sovereign investor base composition matters
- Three broad channels of importance:
  - Borrowing costs: shifts in investor composition can affect demand for government debt and thus yields; increases in foreign or real money investors typically associated with lower sovereign bond yields.
  - External funding risks: a rising share of foreign investors can increase sensitivity to external funding conditions and risk of sudden stops; foreign private investors may be less willing to roll over or more likely to sell holdings during stress.
  - Risk to domestic financial stability: high domestic bank holdings of own-government debt can create two-way sovereign-bank interdependence, risking confidence and requiring sovereign support.
- Investor base diversity implications:
  - A more diverse investor base can facilitate greater international risk sharing and increase secondary market liquidity.
  - A concentrated investor base may ease liability management operations.

### Methodology and data overview (investor base estimates)
- Coverage and frequency:
  - Estimates compiled quarterly, covering 2004 to mid-2013 for 24 emerging markets.
- Definition of debt:
  - General government gross debt (central government, state and local governments, and social security funds where applicable); includes securities and loans (local and foreign currency); excludes arrears, financial derivatives, guaranteed debt, or other contingent liabilities; all debt figures compiled on a gross basis.
- Investor classes decomposed (six classes):
  - Domestic banks; domestic nonbanks; domestic central bank; foreign banks; foreign nonbanks; foreign official sector.
  - Banks = depository institutions other than central banks. Nonbanks = insurance companies, pension funds, investment funds (mutual funds, ETFs, SWFs).
  - Foreign official sector includes official loans and foreign central bank holdings of EM government debt as reserve assets.
- Data sources and harmonization:
  - Primary reliance on international, cross-comparable sources (Table 2): Eurostat QPSD, GFS, IMF QEDS, BIS International Banking Statistics, IFS, COFER, CPIS, national sources.
  - Guiding principle: investor holdings represent outright ownership; pledged or collateralized debt not counted as transfer of ownership.
  - For EU countries an additional category “currency and deposits” exists (savings certificates and retail bonds) — generally small share.
- Sample specifics and construction:
  - For China, use “augmented” government debt estimates constructed by Zhang (2014) as reported in IMF’s 2013 Article IV consultation report with China (IMF Country Report 13/211), capturing central government debt and LGFV market borrowing.
  - For Colombia and South Africa local government debt available from national sources; for other countries local government debt estimated from IFS (“depository corporations’ claims on local governments”) assuming local governments borrow mainly from domestic banks.
  - Currency composition of central government debt securities compiled from national sources and included in online dataset.

### Foreign holdings estimation details
- Foreign holdings estimated from QEDS as sum of:
  - General government securities held externally (money market instruments; bonds and notes), and
  - General government loans held externally.
- Valuation practice:
  - All debt security holdings reported at face value except for specific QEDS-reporting countries where market/face adjustments applied.
  - QEDS reports market value for Latvia, Lithuania, Poland, South Africa, Thailand, and Hungary (with Hungary switching from face to market value after 2008); these are converted to face value using national data ratios where needed.
- Supplemental national data:
  - For countries where QEDS does not include foreign holdings of locally-issued government debt (Brazil, China, Colombia, Egypt, Malaysia, Peru, Philippines, Turkey), QEDS supplemented with national sources (Tesouro Nacional, ChinaBond, Ministry of Finance and Public Credit of Colombia, Central Bank of Egypt, Bank Negara Malaysia, Central Reserve Bank of Peru, Turkish Undersecretariat of Treasury).
  - For the Philippines, foreign holdings of locally-issued government debt inferred from balance of payments statistics (“portfolio liabilities of general government”).
- Historical series gaps:
  - QEDS data do not go back to 2004 for Bulgaria, Egypt, India, Indonesia, Philippines, and Romania; historical data obtained from national sources and aligned with later QEDS series.

### Valuation notes and exceptions (QEDS)
- Table of QEDS valuation by country shows:
  - Market value reported in QEDS for: Latvia, Lithuania, Poland, Hungary (post-2008), South Africa (local-currency debt in market value; foreign-currency debt in face value), Thailand (foreign-currency debt at market value).
  - Face value reported in QEDS for the remaining sample countries listed.
- Conversion approach:
  - For Latvia, Lithuania, Hungary, Poland: use national data providing market and face values to convert QEDS to face value.
  - For South Africa and Thailand: use National Treasury and Bank of Thailand data, respectively, to convert QEDS to face value.

### Illustrative scenarios and analytical tools
- The paper constructs Funding Shock Scenarios (FSS) to assess countries’ sensitivity to external funding shocks.
  - FSS highlight the importance of: extending maturity of government debt; developing a local investor base; maintaining liquidity buffers to mitigate external funding shocks.
- The Foreign Investor Position Index (FIPI) is introduced to track exposures of foreign investors to different markets within a global benchmark portfolio.

### Policy implications (summary)
- Mitigating external funding shocks and sovereign-bank linkages:
  - Extend the maturity of government debt.
  - Develop a local investor base to reduce reliance on potentially less stable foreign private investors.
  - Maintain liquidity buffers.
  - Pay special attention to investor relations, particularly with foreign investors.
- Monitoring and management:
  - Track investor base composition and diversity to assess market liquidity, risk sharing, and suitability of liability management operations.
  - Monitor concentration of holdings in domestic banks to limit sovereign-bank interdependence risks.

*Source: IMF working paper content (wpiea2014039-print-pdf).*

### part is similar to the “allocated” part. Moreover, 80 percent of these reserve assets are

### IV.   KEY TRENDS IN THE EM SOVEREIGN DEBT INVESTOR BASE

### Foreign central bank holdings and reserve-asset decomposition
- Assumption: "80 percent of these reserve assets are assumed to be in the form of government debt securities."  
- CPIS/COFER-based estimate: "foreign central banks held about US$40 billion of EM government debt, out of a total of about US$1 trillion of total foreign holdings, as of end-2012."  
- Adjusted upper estimate if assets recorded as "securities not included in official reserve assets" were all EM government debt: "about US$80 billion (or 8 percent of total foreign holdings) as of end-2012."  
- Caveat: IMF statistical guidelines recommend including only assets denominated or settled in convertible foreign currencies as reserve assets; countries reported "about $40 billion of assets recorded as 'other foreign currency assets' as of end-2012 (in particular through the part identified as 'securities not included in official reserve assets')."  
- Concentration: foreign central bank holdings are concentrated in sovereign debt of seven EMs: "Brazil, China, Indonesia, Malaysia, Mexico, Poland, and South Africa."  
- Credit-rating alignment: IMF survey found minimum credit rating allowed in most reserve managers' frameworks is "single-A"; seven EMs satisfied this criterion on local currency bonds as of end-2012: "Brazil, Chile, China, Malaysia, Mexico, Poland, and South Africa." (Except Chile, small market.)  
- WGBI overlap: EMs included in Citibank's WGBI and in the seven-country list: "Malaysia, Mexico, Poland, and South Africa."

### Construction of investor-holdings estimates and data sources
- Reserve-asset decomposition: "decompose reserve assets in 'other currencies' into specific EM countries based on the CPIS database."  
- Foreign official loans: "include bilateral loans from other countries and multilateral loans from international financial institutions" and captured using "external loan statistics in QEDS."  
- Foreign bank holdings: estimated primarily from "BIS International Locational Banking Statistics" (reporting banks in 43 countries), supplemented by "BIS International Consolidated Banking Statistics" to estimate share of claims on government within nonbank claims.  
- Foreign bank holdings formula (textual): foreign bank holdings = locational claims on nonbank sector_i,t * x_it/(x_it + y_it) where x_i = total international claims on public sector on immediate borrower basis (Consolidated Table 9A:G) and y_i = international claims on the nonbank private sector on immediate borrower basis (Consolidated Table 9A:H).  
- Foreign nonbank holdings: "estimated as the difference between total foreign holdings and the holdings of the foreign official sector and foreign banks."  
- Domestic investor holdings: "estimated as the difference between total debt and foreign debt holdings."  
- Domestic central bank and domestic bank holdings: obtained from "IFS" based on "gross claims of monetary authorities and 'other depository corporations' on the central government and local government." Brazil and Mexico supplemented by national data.  
- Domestic nonbank holdings: "estimated as the difference between total domestic holdings and the holdings of domestic banks and the central bank."

### Key findings on foreign investor composition and scale (2004–12)
- Total foreign holdings (end-2012): "about US$1 trillion of EM government debt (excluding foreign official loans)."  
- Foreign nonbanks (asset managers) at end-2012: "about US$800 billion of EM government debt, or about 80 percent of total foreign holdings (excluding foreign official loans)."  
- Foreign central banks estimate reiterated: "about US$40-80 billion of EM government debt" with concentration in seven countries listed above.  
- Foreign official loans: "remain important for some countries (Bulgaria, Romania, and Ukraine), but have become less important for others (Indonesia, Russia, and South Africa)."  
- Trend: "the share of foreign banks in total foreign holdings has been declining steadily."  
- Foreign participation average: "the average foreign share in EM sovereign debt markets was only 24 percent at end-2012, more than 10 percentage points lower than the average foreign participation rate in advanced economies."  
- Credit-rating correlation: "One-third of our sample reached investor grade status (BBB- or higher) during 2005–12," e.g., "Brazil, Bulgaria, Colombia, Indonesia, Peru, Romania, Russia, and Uruguay."  
- WGBI inclusions: "four EMs were included in Citibank WGBI (Poland, Malaysia, Mexico, and South Africa)."

### Dynamics across three periods: before, during, and after the GFC
- Before the GFC (2006–08): "foreign investors showed moderate differentiation among countries"; some countries retired external bonds (Poland, Thailand, Peru) leading to declines in foreign holdings; India and Egypt saw gradual increases.  
- During the GFC (2008–09): foreign flows "became much more differentiated"; "foreign investors reduced their holdings of EM government debt as a whole by about US$ 40 billion during 2008–09."  
  - Regional patterns during GFC:  
    - EMEA: largest outflows; foreign ownership declined from "about 35 percent to 27 percent for EU countries" and "from over 20 percent to about 15 percent for non-EU countries."  
    - Asia: "very little foreign outflows" except Malaysia (nearly 10 percentage point fall from peak to trough).  
    - Latin America: outflows modest; Uruguay saw largest decline in region.  
  - Country examples with severe drops: "Ukraine, where the foreign participation rate dropped from 50 to 20 percent within a year after the onset of the GFC."  
- After the GFC (2010–12): large across-the-board foreign inflows; "about half a trillion dollars of foreign investment went into emerging market government debt during 2010–12, mostly coming from foreign asset managers."  
  - As of end-2012: "total foreign investors held about US$1 trillion of EM government debt"; "About half of these holdings were accumulated during the three years from 2010 to 2012."  
  - Drivers: improved EM fundamentals, "five EMs reached or regained investment grade status during 2010–12," investors' "search for yield" amid near-zero interest rates and unconventional monetary policies in advanced economies.

### Foreign investor flows: measurement and adjustments
- Foreign flows decomposition: changes in foreign investor holdings between periods attributable to "(i) transactions; (ii) price revaluations; (iii) exchange rate changes; or (iv) statistical reclassifications."  
- Price revaluations: addressed by compiling estimates at face value.  
- Exchange rate changes: handled directly in flow calculations; exchange-rate adjusted foreign flows formula provided:  
  - Flow_t = (FC Debt_t − FC Debt_t−1) * ε_t + (LC Debt_t − LC Debt_t−1)  
  - Definitions:  
    - Flow_t: "Foreign flow (denominated in local currency) during t"  
    - FC Debt_t: "Foreign holdings of foreign-currency debt securities (denominated in U.S. dollars) at end-t"  
    - LC Debt_t: "Foreign holdings of local currency debt securities (denominated in local currency) at end-t"  
    - ε_t: "Average exchange rate against the U.S. dollar during t"  
- Data coverage: "Data on foreign ownership of local-currency central government debt securities are available for most countries in the sample from national data sources (see Annex Figure 2)."  
- Illustration: "The estimated foreign flows, adjusted for exchange rate changes, are reported in detail in Annex Figure 3."

### Investor-country-of-origin estimation
- Method: use dataset plus "CPIS database on portfolio holdings (Table 5.2)" with assumption that "the country of origin of foreign investors for government debt is similar to the country of origin of foreign investors investing in other securities issued in that country."  
- Illustration: Hungary (mostly held within the euro area) and the Philippines (held more broadly including investors outside of Asia).  
- Limitation: custodial holdings and immediate-borrower basis can misattribute ultimate investor origin.

### Domestic bank holdings and sovereign-bank linkages
- Regional trend: "Domestic bank sovereign exposures (as percent of bank assets) rose across all regions during the GFC, but have been declining since then in Asia and Latin America."  
- Post-GFC developments:  
  - Asia and Latin America: banks "started to reduce their sovereign exposures (as percent of asset)" and for most countries exposures are "now lower than where they were at end-2009."  
  - EMEA: bank holdings "remained elevated after 2009 and even rose further in a few cases (Romania, Egypt)"; in some countries (Poland, Turkey) bank holdings declined significantly.  
- High exposures (end-2012): exposures "remain high in Argentina, Egypt, and India, where they make up more than 20 percent of assets."  
- Elevated exposures (end-2012): "Brazil, China, Hungary, Philippines, Poland, Romania, and Turkey" have bank sovereign exposures "more than 15 percent of assets."

### Robustness checks, estimation adjustments, and limitations
- Comparison with national data: for about half the sample, estimates are "in line with national data sources" despite comparability challenges (sector, instrument, valuation).  
- Basic consistency checks: ensured foreign central bank holdings ≤ total foreign holdings; checked foreign bank holdings ≤ (total foreign holdings − foreign official holdings). Exceptions in some periods for "Bulgaria, Chile, India, Romania, and Thailand" led to alternative measures using benchmarks from other EMs.  
- Limitations highlighted:  
  - Foreign central bank holdings may be understated when reserve-asset reporting excludes some securities; CPIS/COFER-based estimate "around $40 billion ... (or 4 percent of total foreign holdings of about $1 trillion)" while adding unrecorded reserve securities could raise to "about US$80 billion (or 8 percent of total foreign holdings) as of end-2012."  
  - Foreign bank estimates may be overstated where large differences exist between BIS locational and consolidated statistics; adjustments made in several cases.  
  - Foreign and domestic nonbanks are implied residuals and "may include measurement errors"; foreign nonbanks may include holdings by banks resident in countries that do not report locational statistics to BIS (e.g., "China, Russia"), though likely a small share.

### Use of dataset for foreign investor transactions and FSS framework introduction
- Dataset primary focus: investor holdings, but also usable for flows and country-of-origin estimates.  
- Sovereign Funding Shock Scenarios (FSS): framework from "Arslanalp and Tsuda (2012)" extended to EMs to examine how "potential funding shocks, in particular external funding shocks, may impact government debt markets."  
- Scenarios described as "hypothetical and involve a common funding shock that occurs over 2013 for all emerging markers irrespective of country fundamentals."

*Source: Excerpt from wpiea2014039-print-pdf (IMF working paper), sections on reserve-asset decomposition, investor holdings estimation, robustness checks, trends in foreign and domestic holdings, flows, and introduction to Sovereign Funding Shock Scenarios.*

### Box 1: Methodology of Sovereign Funding Shock Scenarios (FSS)

### Box 1: Methodology of Sovereign Funding Shock Scenarios (FSS)

### Objective and scope
- Aim: assess the potential impact of sudden foreign outflows from a government debt market on domestic bond yields and domestic sovereign-bank linkages over a one-year horizon.
- Shock trigger: foreign private investors stop rolling over their holdings or pull out of a government debt market over a one-year horizon.
- Key behavioral assumptions:
  - Domestic nonbanks (insurance companies, pension funds, and investment funds) remain “stable buyers” in line with asset-liability mandates.
  - Domestic banks act as “swing buyers” to fill remaining demand.
  - Foreign official lenders and the domestic central bank act only as “lenders of last resort.”

### Core logic and interpretation
- If the amount domestic banks must absorb is large (as percent of total assets), this suggests:
  - sovereign bond yields may have to rise due to insufficient buyers; and/or
  - bank-sovereign linkages may rise as domestic banks purchase large amounts of government debt, raising exposure to sovereign and interest-rate risk and potentially crowding out private-sector lending.
- Domestic nonbanks’ projected take-up of government debt is based on their average net purchase over the last three years for each country (ranges between 0-3 percent of GDP for most countries in the sample).

### Parameters governing foreign investor behavior
- Three parameters determine foreign private investors’ actions:
  - α: their contribution to the funding of the overall fiscal deficit over the next year.
  - β: their rollover of short-term government debt holdings by residual maturity (i.e., debt maturing over the next year).
  - γ: their sale of long-term government debt holdings by residual maturity (liquidation beyond gross financing needs).
- Interpretations:
  - α determines contribution to net financing needs.
  - α and β together determine contribution to gross financing needs.
  - γ determines additional liquidation beyond gross financing needs.

### Accounting decomposition and exact formulas (as in source)
- Gross financing needs decomposition:
  - GFN_t = D_t + M_t = FD_t + OD_t + FM_t + OM_t
    - Where: GFN, D, and M stand for gross financing needs, fiscal deficit, and maturing debt, respectively. FD and OD stand for fiscal deficit financed by foreign private and other investors, respectively, while FM and OM stand for maturing debt held by foreign private and other investors, respectively.
- Proportional share assumptions (foreign private investors’ share proportional to their share in total debt stock):
  - FD_t = D_t * FS_t / TS_t
  - OD_t = D_t * OS_t / TS_t
  - FM_t = M_t * FS_t / TS_t
  - OM_t = M_t * OS_t / TS_t
    - Where: FS, TS, and OS stand for debt stock held by foreign private investors, total debt stock, and debt stock held by other investors, respectively.
- Foreign private investors contribute to α percent of annual fiscal funding needs, roll over β percent of their share of maturing debt, and sell γ percent of their remaining stock.
- Foreign outflows:
  - Foreign Outflows = (1−β) FM_t + γ(FS_t − FM_t)
- Additional government debt to be absorbed by domestic banks:
  - Additional Debt = D_t (1−α) + Foreign Outflows − Debt take up by domestic nonbanks
- Resulting domestic bank holding of own government debt:
  - Bank Holding of Own Government Debt = DBS_t + Additional Debt
    - Where DBS stands for domestic bank holding at time t.

### Scenario parameterization (specific scenarios in paper)
- Parameter settings applied:
  - α = 0 in all scenarios.
  - β = 0 in Scenario 1; β = 50 percent in Scenarios 2 and 3.
  - γ = 0 except in Scenario 3 where γ = 30 percent.
- Illustrative scenarios (increasing severity):
  - Scenario 1 (maintain exposure): foreign private investors fully roll over holdings maturing in a year, but do not provide new financing to the government.
  - Scenario 2 (passive sale): foreign private investors roll over only 50 percent of their government debt holdings maturing in a year.
  - Scenario 3 (active sale): foreign private investors sell 30 percent of their long-term debt holdings in local currency to domestic investors (severe; broadly based on a historical episode during the 2008 crisis).

### Illustrative findings and country implications
- Scenario 1:
  - Most countries resilient. For all countries except Egypt, Lithuania, and Poland, domestic bank purchases required to close government funding needs would not be more than 3 percent of bank assets.
- Scenario 2:
  - More widespread impact. In addition to Egypt, Lithuania, and Poland, Argentina, Hungary, Mexico, and Ukraine may become sensitive to foreign outflows.
- Scenario 3:
  - Active sale extends vulnerability to a wider group, including Indonesia, South Africa, Turkey, and Uruguay. Under this scenario, domestic banks in these and other countries may have to re-allocate more than 3 percent of their assets to government debt in a single year.
- Historical consistency:
  - Pressure on EM government bonds in summer 2013 was broadly in line with this illustrative analysis; eight of the ten countries with the largest rise in long-term local-currency bond yields were among those identified as sensitive.
- Liquidity buffers and maturity profile matters:
  - Countries with high liquidity buffers (e.g., Mexico and Poland) experienced less market impact despite higher shares of foreign holdings.
  - Uruguay noted as having very high average maturity of debt and large liquidity buffers (source notes: deposits could cover around 3 years of central government debt amortization and contingent credit lines worth $1.4 billion as of end-2012).

### Policy implications and recommendations
- Key measures to mitigate external funding shocks:
  - Keep ample liquidity buffers (e.g., government deposits, contingent credit lines).
  - Extend the debt maturity profile (less back-loaded amortization).
  - Develop the domestic investor base to reduce reliance on foreign private investors.
- Institutional tools:
  - IMF Flexible Credit Line (FCL) access noted for Colombia, Poland, and Mexico as relevant in this context.

### Limitations and caveats
- Impact versus likelihood:
  - The exercise measures the impact of a common external shock, not the country-specific likelihood of such a shock. Likelihood could be incorporated by calibrating shock size to country fundamentals.
- Correlated funding shocks:
  - If government shocks coincide with funding shocks for domestic banks and corporates, pressure on government bond yields could be larger (banks forced to deleverage; corporates rely on banks; domestic resident capital outflows could worsen deposit pressures).
- Composition of bank assets:
  - Banking systems holding large liquid assets (other than government bonds) may absorb shocks more easily. Large-scale central bank provision of liquidity could also help.
- Exchange rate:
  - Exercise focuses on bond-yield impacts, not exchange rates. Exchange rate dynamics depend on other capital flows, investor hedging, and central bank intervention; depreciation could help stem foreign outflows.

### Foreign Investor Position Index (FIPI) — brief
- Purpose: track foreign investors’ positions relative to a global benchmark (JPMorgan GBI-EM Global) to infer active overweight/underweight positions.
- Construction:
  - FIPI_i = F_i / Σ F_i_Ni − D_i / Σ D_i_Ni
    - Interpretation: FIPI_i < 0: Underweight; FIPI_i > 0: Overweight.
    - Where F_i = foreign investor holding of country i’s government debt in local currency; D_i = outstanding government debt of country i included in JPMorgan GBI-EM Global (excluding Nigeria).
- End-June 2013 signals:
  - Foreign institutional investors overweight Mexico, Turkey, and Philippines; underweight Russia, South Africa, and Thailand.
  - Mexico overweight by five percentage points relative to GBI-EM Global country weight.

*Source: Box 1, "Methodology of Sovereign Funding Shock Scenarios (FSS)", wpiea2014039-print-pdf*

### Annex Figure 1. Emerging Markets: Holders of Government Debt, 2004–13Q2

### Annex Figure 1. Emerging Markets: Holders of Government Debt, 2004–13Q2

### Coverage and metrics
- Time period covered: 2004–13Q2.
- Main presentation: components in percent; total in percent of GDP.
- Two vertical scales shown across panels: "Percent of GDP" (left axis) and "Percent of total" (right axis).
- Countries and groups shown (individual country panels and regional aggregates): Argentina; Brazil; Bulgaria; Chile; China; Colombia; Egypt; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Uruguay; All Countries; BRICs; Asia; Latin America; EMEA-EU; EMEA-Non EU.

### Holder categories reported (legend repeated across panels)
- Domestic central bank
- Domestic bank
- Domestic nonbank
- Foreign official sector
- Foreign bank
- Foreign nonbank
- Total debt (rhs)

### Notes on definitions and data construction
- "Government debt indicates general government gross debt."
- "Domestic banks are depository corporations residing in the country (IFS definition)."
- "Foreign banks are BIS reporting banks residing outside the country."
- "Foreign official loans indicate loans from bilateral and multilateral creditors."
- "Foreign nonbanks and domestic nonbanks are imputed from external and total debt."
- Source attribution for calculations: "Authors'calculations."

### Presentation particulars and caveats visible in panels
- Several country panels include dual axis presentation with percent-of-GDP scale (left) and percent-of-total scale (right).
- Some panels show wide ranges for total debt on the right-hand scale, e.g., up to "120" (percent of GDP) for specific country panels.
- The figure sequence spans multiple pages (figures labelled continued) indicating the same layout and legend repeated for each country and aggregate group.

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### Annex Figure 2. Foreign Holdings of Local-Currency Government Debt Securities, 2004–13Q2

### Coverage and metrics
- Time period covered: 2004–13Q2 (series plotted 2004–2013).
- Metric: foreign holdings in percent of total local-currency government debt securities.
- Regional and country panels: Asia (China, Indonesia, India, Malaysia, Philippines, Thailand); Latin America (Argentina, Brazil, Colombia, Mexico, Peru); EMEA-EU (Bulgaria, Hungary, Latvia, Lithuania, Poland, Romania); EMEA-Non EU (Egypt, Russia, South Africa, Turkey, Ukraine).

### Notes and caveats
- "Government debt indicates central government debt securities denominated in local currency."
- "For Egypt, these include only government bills."
- "For South Africa, they include only government bonds (excluding retail bonds)."
- "Shaded area represents 2008-09."
- Source attribution: "National sources and authors' calculations."

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### Annex Figure 3. Cumulative Foreign Flows into Government Debt Securities (billions of U.S. dollars since end-2007)

### Coverage and metrics
- Time reference: cumulative flows since end-2007 (scale in billions of U.S. dollars).
- Series shown: Foreign-currency denominated and Local-currency denominated flows (stacked/parallel series in country panels).
- Country panels and aggregates included: Argentina; Brazil; Bulgaria; China; Colombia; Egypt; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; All Countries; BRICs; Asia; Latin America; EMEA-EU; EMEA-NonEU; Uruguay (note on availability).

### Selected numeric scale highlights as displayed in panels (exact axis markers shown)
- Argentina panel axis markers: -14, -12, -10, -8, -6, -4, -2, 0, 2, 4, 6.
- Brazil: -20, 0, 20, 40, 60, 80, 100, 120, 140.
- Bulgaria: -1.2, -1, -0.8, -0.6, -0.4, -0.2, 0, 0.2.
- China: -6, -4, -2, 0, 2, 4, 6, 8, 10.
- Colombia: -1, 0, 1, 2, 3, 4, 5, 6, 7.
- Romania note: "Estimates are only available after 2010Q3 for Romania."
- Uruguay note: "Estimates are not available for Uruguay."

### Notes on availability and methodological caveats
- "Estimates are not available for Chile and start only after 2009Q4 for Colombia."
- "Note: Estimates are not available for Uruguay."
- Source attribution in panels: "Authors'calculations."

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*Source: Authors' calculations (figures and notes extracted from the provided content).*

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_Source: https://www.imf.org/-/media/files/publications/wp/wpiea2014039-print-pdf.pdf_