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Primary Balance, Debt Composition, and Sovereign Yields in Emerging Economies

Author

Listed:
  • John Beirne

    (Asian Development Bank)

  • Abhishek Kumar

    (University of Southampton, Southampton, UK.)

  • Sushanta Mallick

    (Queen Mary University of London, London)

  • Donghyun Park

    (The South East Asian Central Banks (SEACEN) Research and Training Centre)

  • Shu Tian

    (Asian Development Bank, Manila)

Abstract

Sovereign yields in emerging economies differ from those in advanced economies because of default risk and the currency and ownership composition of government debt. As a result, the relative important of the channel through which fiscal consolidation affects yields is not clear ex ante. We decompose ten-year sovereign yields in 17 emerging markets into default-risk premia, expected short rates, and term premia. We show that debt vulnerabilities, including high foreign-currency borrowing (“original sin†), large foreign holdings of local-currency debt (“original sin redux†), and large domestic holdings of foreign-currency debt, are associated with higher default-risk and term premia. The results suggest that debt composition, rather than the fiscal stance alone, governs the transmission of fiscal consolidation to sovereign yields in emerging economies. While fiscal consolidation could lower term premia in vulnerable economies, easing borrowing conditions, stronger growth prospects or anticipated monetary tightening could push expected short rates higher. Understanding these channels can help central banks assess overall financial conditions more accurately.

Suggested Citation

  • John Beirne & Abhishek Kumar & Sushanta Mallick & Donghyun Park & Shu Tian, 2026. "Primary Balance, Debt Composition, and Sovereign Yields in Emerging Economies," Working Papers wp66, South East Asian Central Banks (SEACEN) Research and Training Centre.
    • Handle: RePEc:sea:wpaper:wp66
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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