Determinants of and Prospects for Market Access in Frontier Economies

IMF Working Papers, May 7, 2021

Source details

Canonical URL: Determinants of and Prospects for Market Access in Frontier Economies

Study examines factors—country-specific macroeconomic fundamentals and external variables—behind the surge in external bond issuance by low-income countries (LICs) termed “frontier economies.”
Uses data on public and publicly guaranteed (PPG) external bond issuance, outstanding PPG bond stock, and sovereign spreads.
Employs panel data analysis to link increases in issuance and reductions in spreads to explanatory variables.
Key conclusion: both country-specific fundamentals and external variables contribute to increased issuance and declining spreads.

Country-specific fundamentals identified as relevant:
- public debt
- current account balance
- level of reserves
- quality of institutions
External variables identified as relevant:
- US growth
- the VIX index
Distinct channels:
- Some variables affect issuance through a country’s need to issue bonds for external financing (“the supply side”).
- Other variables correlate with issuance through their impact on investors’ appetite for a country’s debt (“the demand side”).
Interaction effects:
- The impact of country-specific variables can be affected by external factors such as global risk appetite.

Analysis provides information to gauge prospects for continued market access by frontier economies.
Findings help assess which other LICs might be able to join frontier economies by tapping international markets for the first time.
Understanding both supply-side financing needs and demand-side investor appetite is important for policy design to maintain or expand market access.

Data sources and variables used include PPG external bond issuance, outstanding PPG bond stock, and sovereign spreads.
Analytical approach: panel data analysis linking country-level fundamentals and external variables to issuance and spreads.