## The New Frontier: Economies on the Rise

_IMF Blog, May 19, 2014_

## Source details

**Canonical URL:** [The New Frontier: Economies on the Rise](https://www.imf.org/en/blogs/articles/2014/05/19/the-new-frontier-economies-on-the-rise)

## Other formats

- [Markdown version](/en/blogs/articles/2014/05/19/the-new-frontier-economies-on-the-rise/index.md)
- [Structured JSON version](/en/blogs/articles/2014/05/19/the-new-frontier-economies-on-the-rise/index.json)
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## Bibliographic details
- Authors: Min Zhu
- Published: May 19, 2014

---

### Overview
- Author: Min Zhu
- Date: May 19, 2014
- Note: (Version in 中文, Français, Português, and Español)
- Core message: A group of fast-growing low-income "frontier economies" are attracting international investor interest; they combine huge potential with significant risks and require tailored policy responses.

### Get to know them (definition and examples)
- Broad working definition: fast-growing low-income countries that have been deepening their financial markets; some have moved to the lower-middle income group.
- Examples of countries deepening financial markets: Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.
- Examples of countries tapping international capital markets: Bolivia, Ghana, Honduras, Mongolia, Nigeria, Senegal, Tanzania, Vietnam, and Zambia.
- Comparative characteristics:
  - Markets are not as deep and liquid as emerging markets.
  - Offer higher returns and portfolio diversification benefits relative to emerging markets.

### How they got there (drivers and reforms)
- Main drivers:
  - Fast growth often supported by sustained efforts to achieve macroeconomic stability.
  - Building business-friendly institutions.
- Policy and structural reforms cited:
  - Lowering inflation via prudent fiscal and monetary policy.
  - Strengthening policymaking apparatus, reducing excessive red tape, lowering trade restrictions.
  - Reforms shifting economic structures toward services (examples: Tanzania and Kenya).
- Debt dynamics and investment:
  - Alleviation of debt burden over the past decade freed resources for physical and human capital investment.
  - Several countries received debt relief under the Highly Indebted Poor Country Initiative; others reduced debt outside this initiative (examples: Kenya, Mongolia, Nigeria, and Vietnam).
- Financial market development:
  - Rapid deepening of domestic financial markets—more domestic financial services and products than peers.
  - Some countries have attracted international investor interest in domestic bond markets and issued sovereign bonds in international capital markets.
- Infrastructure financing opportunity:
  - Access to international capital markets can attract financing to address infrastructure gaps (roads and railways), providing further growth impetus.
  - But market access also introduces new financial risks that require careful management.

### Influences from outside their borders
- Global financial environment:
  - Low interest rates combined with advanced economies shedding debt pushed investors to seek higher returns, expanding interest in frontier economies.
- Resource demand:
  - Emerging economies' quest for resources improved terms of trade and spurred domestic and foreign investment in resource-rich countries (examples: Bolivia, Ghana, Nigeria, and Mongolia).
- Public investment:
  - Low debt burden, favorable external borrowing rates, and high commodity prices increased access to private financing sources abroad, raising domestic public investment.

### Risks and policy recommendations
- Identified risks:
  - Greater market scrutiny from external private capital exposes weaknesses in domestic macroeconomic policies (weakening fiscal and external positions).
  - Potential slowdown in capital flows as U.S. interest rates rise and monetary policy normalizes.
  - Countries with foreign investor participation in domestic bond markets and significant fiscal and current account imbalances have experienced volatile exchange rates and rising spreads in recent months.
  - Limited size and liquidity of government bonds in international capital markets mitigates—but does not eliminate—the risk of capital flow reversals; new issuances may face higher spreads and maturing bonds may struggle to find buyers.
- Policy recommendations and measures:
  - Preserve macroeconomic stability and fiscal sustainability.
  - Continue building adequate external reserves.
  - Bolster economic and institutional fundamentals, including domestic savings.
  - Further structural reforms (labor, trade, regulation) and higher investment to enhance productivity and help countries move up the value chain.
  - Deepen domestic bond markets to allow more efficient intermediation of financial flows.
  - Monitor build-up of risks and preserve fiscal and debt sustainability.
  - Use proceeds of government bonds for high-yielding projects, whether issued domestically or internationally.
  - Consider framework in the IMF’s recent paper on managing capital flows to help manage risks associated with these flows.

### Concluding assessment
- Frontier economies show great promise but face significant risks from increased capital flow exposure.
- Continued commitment to macroeconomic stability, fiscal and external sustainability, and investor-friendly institutional improvements is central to continued success.
- Policymakers should optimize benefits from capital flows while taking actions to address related risks.

*Source: The New Frontier: Economies on the Rise, Min Zhu, May 19, 2014.*

---

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---

## References

- [emerging markets](http://blogs.imf.org/2014/01/22/emerging-markets-need-to-do-more-to-remain-engines-of-global-growth/)
- [https://www.imf.org/wp-content/uploads/2014/05/real-gdp-growth2.jpg](https://www.imf.org/wp-content/uploads/2014/05/real-gdp-growth2.jpg)
- [https://www.imf.org/wp-content/uploads/2014/05/inflation-percent-change2.jpg](https://www.imf.org/wp-content/uploads/2014/05/inflation-percent-change2.jpg)
- [greater weight on the services sector](http://www.imf.org/external/pubs/ft/survey/so/2013/POL030413A.htm)
- [Highly Indebted Poor Country Initiative](http://www.imf.org/external/np/exr/facts/hipc.htm)
- [issued sovereign bonds](https://www.imf.org/external/pubs/ft/reo/2013/afr/eng/sreo0513.htm)
- [https://www.imf.org/wp-content/uploads/2014/05/trends-in-portfolio-flows1.jpg](https://www.imf.org/wp-content/uploads/2014/05/trends-in-portfolio-flows1.jpg)
- [https://www.imf.org/wp-content/uploads/2014/05/embi-and-index-and-frontier-econ-bond-spreads1.jpg](https://www.imf.org/wp-content/uploads/2014/05/embi-and-index-and-frontier-econ-bond-spreads1.jpg)
- [as well as regulation and higher investment](http://www.imf.org/external/pubs/ft/reo/2014/apd/eng/areo0414.htm)
- [debt sustainability](http://www.imf.org/external/pubs/ft/dsa/index.htm)

_Source: https://www.imf.org/en/blogs/articles/2014/05/19/the-new-frontier-economies-on-the-rise_