SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Ministry of Finance
The IMF Working Paper (WP/26/10), titled ‘Market Access and High Spread Issuances,’ investigates the critical factors that allow emerging markets and developing economies (EMDEs) to access international capital markets when borrowing costs are high. Using a random forest machine learning approach, the study identifies that while moderate spreads facilitate issuance, high spreads (typically above 600–700 bps) trigger credit rationing due to heightened moral hazard and adverse selection risks. The research highlights that economic size (Nominal GDP) and international reserves are the most consistent predictors of market access, providing a “safety signal” to global investors.
Predictors of Capital Market Access
Top Determinants: The likelihood of bond issuance is primarily driven by a country’s outstanding international obligations, followed by its level of international reserves and short-term external debt.
The Spread Paradox: There is an inverted U-shaped relationship between sovereign spreads and issuance; probability peaks at moderate spread levels but declines sharply as spreads widen, as lenders fear reduced borrower incentives to repay.
Non-Linear Interactions: Smaller economies and those with high spreads are significantly more sensitive to global risk sentiment (VIX) and the quality of domestic governance.
Role of Official Credit: For high-spread countries, the presence of official sector creditors (like the IMF or World Bank) can act as a catalyst, providing a “seal of approval” that helps restore private market confidence.
Unconventional Instruments for Market Entry
Restoring Access: When traditional bond markets close due to high spreads, EMDEs often utilize unconventional instruments such as third-party guarantees, macro-contingent debt, or collateralized loans.
Size and Structure: These high-spread issuances are frequently larger than conventional bonds and are increasingly common among frontier markets seeking to refinance debt during global liquidity squeezes.
Governance Premium: Improvements in the Rule of Law and institutional transparency have a disproportionately positive impact on market access for countries currently perceived as high-risk.
What is ‘Credit Rationing’ and why does it occur at high sovereign spreads? It is a market phenomenon where lenders limit the supply of additional credit to borrowers who are willing to pay even higher interest rates. In sovereign markets, this occurs because as interest rates (spreads) rise beyond a certain threshold, the cost of repayment becomes so high that it creates a “moral hazard,” where the borrower has less incentive to exert the fiscal effort needed to avoid default. Additionally, “adverse selection” means that only the riskiest borrowers—those most likely to default—remain willing to borrow at extreme rates. Consequently, rational investors stop lending entirely to prevent losses, regardless of the offered yield.
Policy Relevance
As a prominent emerging market, India’s “Outlier” growth status allows it to leverage these findings to optimize its international borrowing and reserve management strategies.
Strategic Impact :
Leveraging Economic Scale: India’s large Nominal GDP acts as a natural buffer, making its market access less sensitive to minor fluctuations in global risk sentiment compared to smaller peers.
Optimizing Reserves: While India’s strong foreign exchange reserves signal creditworthiness, the report suggests they can also act as a substitute for external borrowing, allowing the government to time its market entries during low-spread windows.
Institutional Strengthening: Further improvements in governance and rule-of-law rankings are identified as the most effective “non-financial” way to compress spreads and attract long-term institutional capital.
Proactive Debt Management: Monitoring the 600-700 bps “rationing threshold” provides a clear early-warning signal for when to shift toward official credit or consider unconventional guarantees to maintain liquidity.
Follow the full paper here: Market Access and High Spread Issuances