Good-Bye Original Sin, Hello Risk On-Off, Financial Fragility, and Crises?

TL;DR

This paper examines sovereign bond issuance patterns in eight emerging markets from 1970 to 2018, highlighting how currency appreciation, monetary policy, and yield levels influence local versus foreign currency bond issuance.

Contribution

It provides new insights into the determinants of local-currency bond issuance in emerging markets over a long historical period, considering macroeconomic and policy factors.

Findings

EM local currency bonds are smaller, shorter, and lower coupon than foreign bonds.

Currency appreciation before 2008 increased local currency bond issuance.

Higher sovereign yields post-GFC are linked to more local currency bonds.

Abstract

We analyze the sovereign bond issuance data of eight major emerging markets (EMs) - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey from 1970 to 2018. Our analysis suggests that (i) EM local currency bonds tend to be smaller in size, shorter in maturity, or lower in coupon rate than foreign currency bonds; (ii) EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC); (iii) inflation-targeting monetary policy increases the likelihood of issuing local-currency debt before GFC but not after; and (iv) EMs that offer higher sovereign yields are more likely to issue local-currency bonds after GFC. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.