Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets

Emanuele Baldacci · Sanjeev Gupta · Amine Mati

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Credit Risk and Financial Regulations Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

Abstract Using a panel of 46 emerging market economies from 1997 to 2008, this paper investigates the key determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal consolidation narrow credit spreads, especially in countries with high initial public debt levels. The composition of fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.

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References

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2010Fiscal Deficits, Public Debt, and Sovereign Bond Yields 2010Fiscal Deficits, Public Debt, and Sovereign Bond Yields 2012Bond Yields in Emerging Economies 2015Political risk and international valuation 2016Volatility transmission from commodity markets to sovereign CDS spreads in emerging and frontier countries 2014International political risk and government bond pricing

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