Frontier Markets: Analyzing Drivers of Market Growth and Sovereign Risks

IMF Working Papers, July 3, 2026

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Canonical URL: Frontier Markets: Analyzing Drivers of Market Growth and Sovereign Risks

Authors: Younes Takki Chebihi, Naoya Kato, Maxwell Kushnir, Andreja Lenarcic, Yinhao Sun, Bilal Tabti
Published: July 3, 2026
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229051774.001

Authors: Younes Takki Chebihi, Naoya Kato, Maxwell Kushnir, Andreja Lenarcic, Yinhao Sun, Bilal Tabti
Publication date: July 3, 2026
Series: IMF Working Papers, Working Paper No. 2026/140
Objective: Deepen understanding of Frontier Markets (FMs) by (i) offering new analysis on the determinants of frontier market status and (ii) using a dynamic country sample to examine factors that help Low-Income Countries (LICs) attain and lose FM status.

Frontier Market (FM) status serves as a steppingstone for Low-Income Countries (LICs) aspiring to become Emerging Markets (EMs).
The FM concept has been present for over three decades and FMs gained substantial investment appeal, particularly after the 2008 Global Financial Crisis.
Recent global shocks starting with the COVID-19 pandemic highlighted persistent vulnerabilities in these countries.

Building robust macroeconomic fundamentals and ensuring good governance are critical for becoming an FM.
Flexible exchange rates, substantial official reserve buffers, and relatively low public debt and deficit levels are identified as key contributors to lessening the sensitivity of FMs’ sovereign spreads to changes in global financial conditions.
The paper emphasizes sensitivity of sovereign spreads to global financial conditions and the mitigating role of specific policy and balance-sheet features.

Determinants emphasized:
- Macroeconomic fundamentals
- Governance quality
- Exchange rate flexibility
- Official reserve buffers
- Public debt levels
- Fiscal deficit levels
Empirical approach: analysis uses a dynamic country sample to study attainment and loss of FM status among LICs.

Strengthen macroeconomic fundamentals to improve the probability of attaining FM status.
Improve governance to enhance investment appeal.
Adopt or maintain flexible exchange rate regimes to reduce external sensitivity.
Accumulate substantial official reserve buffers to lower sovereign spread sensitivity to global shocks.
Maintain relatively low public debt and deficit levels as stabilizing factors for sovereign spreads.