Fundamentals and Sovereign Risk of Emerging Markets

27 Pages Posted: 18 May 2016

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Yothin Jinjarak

University of London - SOAS - Department of Financial and Management Studies

Donghyun Park

Asian Development Bank - Economic Research

Date Written: May 2016

Abstract

We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004–2012, which encompasses the global financial crisis of 2008–2009. Inflation, state fragility, external debt and commodity terms of trade volatility were positively associated, while trade openness and a more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre‐crisis period, the external debt/GDP ratio and inflation in the crisis period, and inflation and the public debt/GDP ratio in the post‐crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.

Suggested Citation

Aizenman, Joshua and Jinjarak, Yothin and Park, Donghyun, Fundamentals and Sovereign Risk of Emerging Markets (May 2016). Pacific Economic Review, Vol. 21, Issue 2, pp. 151-177, 2016. Available at SSRN: https://ssrn.com/abstract=2781282 or http://dx.doi.org/10.1111/1468-0106.12160

Joshua Aizenman

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yothin Jinjarak (Contact Author)

University of London - SOAS - Department of Financial and Management Studies ( email )

College Buildings
Russell Square
London, WC1H 0XG
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yothinjinjarak/

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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