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Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets

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  • Sanjeev Gupta
  • Amine Mati
  • Emanuele Baldacci
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    Abstract

    Using a panel of 30 emerging market economies from 1997 to 2007, this paper investigates the determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both fiscal and political factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, while efforts at fiscal consolidation narrow credit spreads, especially in countries that experienced prior defaults. The composition of fiscal policy matters: spending on public investment contributes to lower spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/259.

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    Length: 23
    Date of creation: 01 Nov 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/259

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    Keywords: Emerging markets; Fiscal consolidation; Sovereign debt; Credit risk; Public investment; bond; fiscal variables; bond spreads; fiscal balance; fiscal policy; sovereign bond; financial markets; fiscal deficit; public debt; market bond; fiscal factors; financial globalization; emerging market bond; fiscal discipline; international capital; fiscal position; debt service; international capital markets; budget deficits; fiscal affairs department; fiscal consolidations; fiscal health; bond spread; fiscal risks; government revenue; fiscal deficits; public spending; flexible exchange rate; financial market; fiscal risk; discretionary fiscal policy; fiscal affairs; cash flow; government budget; international financial markets; private sector bond; bond issue; private bond; foreign debt; budget surplus; tax increases; bond issues; fiscal stability; sovereign bonds; increase in capital spending; public finance; bonds; derivative instruments; bond issuers; derivative; foreign borrowing; fiscal vulnerability; fiscal stance; access to international capital; financial stability; financial liberalization; composition of public spending; public investment spending; fiscal situation; interest expenditure; bond index; bond price; fiscal policy variables; currency crises; fiscal institutions; fiscal surplus; international reserves;

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    Cited by:
    1. Nazim Belhocine & Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 13/93, International Monetary Fund.
    2. Giancarlo Corsetti & Keith Kuester & Andre Meier & Gernot J. Muller, 2011. "Soverign risk and the effects of fiscal retrenchment in deep recessions," Working Papers 11-43, Federal Reserve Bank of Philadelphia.
    3. Salvatore Dell'Erba & Sergio Sola, 2013. "Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel," IMF Working Papers 13/159, International Monetary Fund.
    4. Giovanni Calice & RongHui Miao & Filip Sterba & Borek Vasicek, 2013. "Short-Term Determinants of the Idiosyncratic Sovereign Risk Premium: A Regime-Dependent Analysis for European Credit Default Swaps," Working Papers, Czech National Bank, Research Department 2013/13, Czech National Bank, Research Department.
    5. Salvatore Dell'Erba & Emanuele Baldacci & Tigran Poghosyan, 2011. "Spatial Spillovers in Emerging Market Spreads," IMF Working Papers 11/221, International Monetary Fund.
    6. María Lorena Mari del Cristo & Marta Gómez-Puig, 2014. "“Dollarization and the Relationship Between EMBI and Fundamentals Latin American Countries”," IREA Working Papers, University of Barcelona, Research Institute of Applied Economics 201406, University of Barcelona, Research Institute of Applied Economics, revised Mar 2014.
    7. Sanjeev Gupta & Carlos Mulas-Granados & Emanuele Baldacci, 2009. "How Effective is Fiscal Policy Response in Systemic Banking Crises?," IMF Working Papers 09/160, International Monetary Fund.
    8. Heather D. Gibson & Stephan G. Hall & George S. Tavlas, 2011. "The Greek financial crisis: growing imbalances and sovereign spreads," Working Papers, Bank of Greece 124, Bank of Greece.
    9. Rocha, Katia & Moreira, Ajax, 2010. "The role of domestic fundamentals on the economic vulnerability of emerging markets," Emerging Markets Review, Elsevier, Elsevier, vol. 11(2), pages 173-182, June.
    10. Kennedy, Mike & Palerm, Angel, 2014. "Emerging market bond spreads: The role of global and domestic factors from 2002 to 2011," Journal of International Money and Finance, Elsevier, Elsevier, vol. 43(C), pages 70-87.
    11. D. Filiz Unsal & Carlos Caceres, 2011. "Sovereign Spreads and Contagion Risks in Asia," IMF Working Papers 11/134, International Monetary Fund.
    12. Guler, Halil & Talasli, Anil, 2012. "Determinants Of Sovereign Bond Spreads A Comparative Analysis During The Global Financial Crisis," MPRA Paper 51009, University Library of Munich, Germany.
    13. Salvatore Dell'Erba & Sergio Sola, 2013. "Fiscal Policy, Interest Rates and Risk Premia in Open Economy," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 05-2013, Economics Section, The Graduate Institute of International Studies.
    14. Vladimir Tomsik, 2012. "Some insights into monetary and fiscal policy interactions in the Czech Republic," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 161-171 Bank for International Settlements.
    15. Maltritz, Dominik & Molchanov, Alexander, 2014. "Country credit risk determinants with model uncertainty," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 224-234.
    16. C. Emre Alper & Lorenzo Forni, 2011. "Public Debt in Advanced Economies and its Spillover Effectson Long-Term Yields," IMF Working Papers 11/210, International Monetary Fund.

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