This, with high borrowing costs and rising debt levels limiting the ability of many governments to raise funds, according to a new study by the International Monetary Fund (IMF). The working paper, released this month, examines how countries with elevated sovereign spreads struggle to issue bonds even when financing needs are urgent.
Researchers analysed decades of data on emerging market issuances and concluded that market access is shaped not only by global conditions but also by domestic balance sheets, governance and the structure of debt.
The study shows that countries with large amounts of short-term external debt and weak foreign reserve buffers are far less likely to tap international markets. When sovereign spreads climb above about 500 basis points, the probability of successful issuance falls sharply, signalling that investors view the risks as too high.
At the same time, the authors found that unconventional financing tools are becoming more common. About 36% of bonds issued at very high spreads included special features such as guarantees, collateral or contingent repayment clauses. These mechanisms, the report argues, can help governments regain access by offering investors greater protection.
Another important finding is the role of expectations. Markets react strongly to forward-looking indicators, particularly projected fiscal balances and public debt levels. Countries expected to record deficits over the next three years face significantly lower chances of issuing debt compared with those forecast to post surpluses.
Institutional quality also matters. Improvements in the rule of law and control of corruption were associated with better access, especially for high-risk borrowers. The research suggests that governance reforms can reduce perceptions of moral hazard and strengthen investor confidence.
Global conditions remain a decisive factor. Periods of robust world growth increase the likelihood of issuance for countries with high spreads, reflecting stronger risk appetite among international investors. Conversely, weaker global activity tends to close markets for the most vulnerable economies.
The IMF paper warns that many developing nations could face prolonged exclusion from capital markets if debt burdens continue to rise. It recommends building reserve buffers, lengthening debt maturities and strengthening fiscal frameworks to improve credibility.
With international interest rates still elevated and refinancing pressures mounting, the study concludes that restoring sustainable market access will require coordinated policy action and innovative financing approaches rather than reliance on traditional bonds alone.
–IMF/ChannelAfrica–
