Global Debt Report 2025

3. Sovereign debt markets in emerging market and developing economies

Abstract

Emerging market and developing economies’ sovereign borrowing from markets continued to rise in 2024 despite borrowing costs hovering near 15-year highs.

Lower-middle and low-income countries faced particularly challenging funding conditions, with many struggling to access global bond markets. With the number of countries with high credit risk close to record levels, large refinancing needs and high borrowing costs threaten to further constrain fiscal space. Countries relying on foreign markets are especially vulnerable. Accelerating the development of local currency bond markets is crucial for ensuring sustainable and resilient sovereign financing for these countries.

Introduction

The monetary policy tightening cycle since early 2022 has been one of the fastest in recent decades, and rising global interest rates having historically been a major trigger of financial crises in emerging market and developing economies (EMDEs). EMDEs, which often have limited domestic savings and revenue, need to borrow to finance investments that promote economic growth and stability. This chapter analyses EMDE sovereign bond markets in this challenging environment. It examines issuance trends, borrowing costs, foreign market access, and credit rating developments and concludes with a refinancing outlook. The chapter predominantly uses available market data sources on central government bond issuance. Annex 3.A provides methodological details.

Key findings

• Emerging market and developing economies’ sovereign bond markets have grown substantially since 2007. Outstanding bond debt reached nearly USD 12 trillion in 2024, up from USD 4 trillion in 2007. During the same period, EMDE annual borrowing from markets tripled from around USD 1 trillion to over USD 3 trillion, with issuance amounts increasing by 12% in 2024. China accounted for 45% of total issuance in 2024, up from 17% in 2007-14.

• Local currency borrowing costs have increased since 2022, with the greatest impact on low-income countries and those with a credit rating of single B or lower. Real yields at issuance rose from negative levels to nearly 4% between 2020 and 2024 in EMDEs, excluding China. In low-income countries, they climbed from 4% to over 7%. The shorter average maturity of their debt makes the outstanding stock more sensitive to rate changes. Half of the current outstanding debt was issued over the past three years with higher yields, adding pressure on government finances.

• EMDEs rely more on foreign currency debt than advanced economies, increasing currency risk and borrowing costs. Excluding China and India, foreign currency denominated debt accounts for around 20% of the total EMDE debt, compared to just 6% for the OECD average. For smaller EMDEs, foreign currency debt has made up around 40% of total outstanding debt since 2018. Importantly, the total cost of foreign currency debt often significantly exceeds that of local currency debt in the long term, when accounting for currency depreciation.

• USD-denominated bond borrowing costs in EMDEs rose from around 4% in 2020 to over 6% in 2024, exceeding 8% for lower non-investment grade countries. As a result, these countries have had negative net borrowing from foreign markets since 2022.

• About half of the rated EMDEs in 2024 were graded as high risk, and 10 as very high-risk or in default. Despite this, the investment grade share of total outstanding EMDE sovereign debt reached a high of nearly 80% in 2024, up from less than half in 2007, driven mainly by increased issuance from larger investment grade EMDEs.

• Over USD 4.5 trillion in EMDE bond debt, about 40% of the total outstanding, will mature by 2027. Low-income and high-risk countries face the greatest refinancing risks, as more than half of their debt comes due during this period, with over 20% maturing in 2025 alone.

• Sovereign issuers in EMDEs should prioritise deepening local currency bond markets to reduce reliance on external debt and mitigate exchange rate risks. This requires strong market infrastructure, transparency, investor diversity, a credible yield curve and stability.

Bond issuance

Issuance by lower income sovereigns has grown more than that of higher income EMDEs since 2007

EMDEs’ sovereign bond markets have grown significantly across all income groups since 2007. Outstanding sovereign bond debt in EMDEs reached nearly USD 12 trillion (around 30% of GDP) in 2024, up from less than USD 4 trillion in 2007 (around 20% of GDP) (Figure 3.1, Panel A). During the same period, annual issuance by EMDEs tripled, from approximately USD 1 trillion in 2007 to over USD 3 trillion in 2024 (Figure 3.1, Panel B).1 This represents an annual growth rate of almost 7% in US dollar, a substantial increase considering that the US dollar appreciated more than 80% against EMDE currencies during this period.

Figure 3.1. EMDEs’ sovereign bond issuance and outstanding bond debt

EMDEs’ sovereign bond outstanding and issuance levels increased in both nominal terms and relative to GDP

Note: Only the GDP values of sovereign issuers with outstanding bonds (Panel A) or issuing (Panels B and C) in that year were included in the denominator of the right-hand side figures.

Source: LSEG and OECD calculations.

The growth in issuance has been particularly marked since the onset of the COVID-19 pandemic. Between 2007 and 2019, annual issuance by EMDEs rose by approximately 90%, reaching just below USD 2 trillion in 2019. Following the pandemic, issuance increased by more than one trillion, reaching over USD 3 trillion in 2024.This trend is strongly influenced by China, whose central government’s issuance accounted for 45% of EMDE sovereign bond market issuance in 2024, compared to around 2% on average during 2015-19 and around 17% in 2007-14. The significant increase in China's borrowing is explored further in Box 3.1.

EMDEs in all income groups increased their sovereign bond issuance, albeit at varying rates (Figure 3.1, Panel C). LICs saw the most significant growth, with sovereign bond issuance increasing 12 times between 2007 and 2024, followed by LMICs (5 times), HICs (3 times), and UMICs, where issuance almost doubled. Despite this rapid growth, LIC sovereign bond markets remain underdeveloped, with gross issuance-to-GDP ratios significantly lower than in other income groups, reaching only 4% of GDP in 2024, compared to nearly double that amount for EMDEs in general.2

LMICs' share of total EMDE sovereign bond issuance rose from approximately 13% in 2007 to 19% in 2024. In contrast, the share of UMICs, excluding China, declined from 50% to 28%. Meanwhile, the shares of HICs and LICs remained largely stable at around 8% and less than 1%, respectively.

The growth in LMICs’ sovereign bond markets was partially reversed following the monetary tightening in advanced economies from 2022, and sovereign debt issuance declined between 2022 and 2024, both in nominal terms and as a share of GDP. This decline was not reflected in aggregate EMDE issuance which was mainly driven by upper middle-income countries where issuance continued to expand after 2023.

Local currency bond markets in EMDEs have strengthened, but maturities remain shorter than in advanced economies, and some countries still rely heavily on foreign currency

Past debt crises during global tightening cycles have shown that the mix of debt instruments and their maturities is crucial for reducing a country's vulnerability to global shocks. The Original Sin Hypothesis posits that countries unable to borrow in their local currency over the long-term face more fragility due to currency or maturity assets-liability mismatches (Eichengreen and Hausmann, 1999[1]).3 Such countries may incur liabilities in foreign currencies without corresponding revenues in that currency, raising currency risk. They might also finance long-term projects with short-term debt, increasing exposure to interest rate shifts. Consequently, changes in market conditions and borrowing needs can more readily precipitate a crisis.

Although funding conditions and high borrowing needs are major sources of vulnerability and often beyond the control of debt managers, prudent debt management helps mitigate these risks by minimising refinancing pressures, and reducing exposure to currency and interest rate fluctuations. When setting borrowing strategies, sovereign issuers take a long-term perspective and consider a trade-off between foreign currency-denominated and local currency bonds that involves balancing funding costs, investor demand, refinancing risk, and interest rate and exchange rate risks.

EMDE sovereign issuers face particular challenges in improving the risk profile of their public debt portfolios due to shallow local currency bond markets, high borrowing costs, and exchange rate volatility, which limit their ability to issue long-term local currency debt. Foreign currency-denominated debt benefits from lower interest rates, strong global demand and longer maturities, but it exposes issuers to exchange rate risk, volatile debt servicing costs, and external shocks.

Box 3.1. China’s growing share of EMDEs’ government debt market

Growth in China’s central government bond market has greatly outpaced that in other EMDEs since 2007 and especially after the outset of the COVID-19 pandemic. The central government’s annual issuance, which averaged less than 5% of the country’s GDP between 2007 and 2019 with no clear upward trend, reached more than 8% in 2024, at USD 1.5 trillion, accounting for 45% of EMDE sovereign issuance.

The share of China’s central government issuance understates the size of its general government bond market, which includes subnational government (SNG) debt. China’s SNGs have a larger amount of outstanding debt than the central government,1 with more than USD 6 trillion in 2024 compared to less than USD 5 trillion (Figure 3.2, Panels A and B). The outstanding amount of China’s SNG bonds is bigger than the sovereign bond market of every OECD country except Japan and the United States.

The Chinese SNG bond market officially began in late 2014, when the central government allowed SNGs to issue bonds up to a ceiling set annually (Figure 3.2, Panels C and D). Before this, local governments were generally prohibited from issuing debt,2 and funded part of their public spending through land right sale revenues and off-balance sheet borrowing, primarily via local government investment vehicles (IMF, 2024[2]). These operations were substantial, with the estimated outstanding debt issued by these vehicles reaching around 60% of GDP by 2019 (OECD, 2022[3]). Consequently, over half of the SNG issuance since late 2014 may represent the conversion of existing local government investment vehicles debt into marketable debt.

Central government issuance surged after 2020, driven by the fiscal needs from COVID-19 mitigation measures and efforts to stimulate the economy amidst the slowdown. Looking ahead, general government debt issuance is projected to keep rising in the near term (OECD, 2024[4]). Local governments may face fiscal challenges as land concession revenues, which represented a substantial part of their budgetary revenues before the pandemic, depend on real estate markets (Kim and Dougherty, 2020[5]). If Chinese monetary policy remains accommodative, this may reduce the impact of higher borrowing on interest expenses, especially since China's government borrows almost exclusively in local currency.

Figure 3.2. Central and subnational government issuance and outstanding bond debt in China

Subnational governments account for a big share of China’s government bond markets

Source: LSEG and OECD calculations.

1. Other EMDEs with reasonably sized SNG bond markets include India and South Africa. Combined, they have nearly USD 600 billion in outstanding SNG bonds (Brochado and Dougherty, 2024[6]). In advanced economies, the SNG bond market amounts to around USD 7 trillion, with the United States comprising over half of it.

2. Although SNG bond issuance was forbidden before 2014, the central government could issue on their behalf. Moreover, there were some SNG bond issuance before 2014 under a pilot programme for selected jurisdictions.

Several macro-financial factors contributed to the development of local currency bond markets in some EMDEs. First, the 2000-14 commodities boom allowed some EMDEs to strengthen their fiscal balances and boost their foreign exchange reserves. Second, quantitative easing programmes to tackle the global financial crisis have depressed long-term rates in US dollars, prompting some investors to diversify their portfolios towards EMDEs. Third, under these favourable conditions, many EMDEs were able to enhance their balance sheets and monetary policy credibility, increasingly adopting more inflation-targeting frameworks and floating exchange rates (Kalemli-Ozcan and Unsal, 2024[7]), all of which reduced the risks associated with holding EMDE local currency debt.

The share of foreign currency bond debt declined notably in lower income countries (LICs and LMICs) from 2007 to the mid-2010s, continuing a broader movement from the early 2000s as these countries developed their local currency bond markets. In LICs, the share dropped from around 40% in 2007 to 20% in 2015, while in LMICs it fell from just above 30% to below 15% (Figure 3.3, Panel A). In contrast, the share of foreign currency bond debt increased in UMICs, though it remained below 20%, and fluctuated around 35% in HICs.

Since 2018, the share of the outstanding bond debt denominated in foreign currency has been the highest in HICs, followed by LMICs, UMICs and LICs (Figure 3.3, Panel A). One reason for this is the differences in funding sources. LICs and some LMICs rely more on loans, including concessional ones, for foreign currency financing, reducing their need to issue foreign currency bonds in markets. In contrast, UMICs and HICs are more likely to access capital markets for foreign currency funding.

Figure 3.3. EMDEs' share of outstanding bond debt in foreign currency and investor base

Smaller EMDEs rely more heavily on foreign currency debt and on foreign investors

Note: UMICs* exclude China and LMICs* exclude India. Values in all Panels are weighted averages based on outstanding bond debt.

Source: LSEG (Panel A), IMF (Panel B) and OECD calculations.

Despite these improvements, EMDEs remain far more reliant on foreign currency debt than advanced economies. In OECD countries, the average share of foreign currency-denominated debt stood at 6% in 2024, with much of this exposure hedged. Among EMDEs, it represents approximately 20%—excluding China and India, the two largest EMDE issuers, both of which have well-developed local currency bond markets.

While there is no clear relationship between a country’s income group and the share of its sovereign debt denominated in local currency, GDP size appears to correlate with the development of local currency bond markets. EMDEs with large GDPs (exceeding USD 1 000 billion) have consistently maintained foreign currency bond debt below 10% of the total outstanding (Figure 3.3, Panel A). In contrast, in countries with GDP between USD 300 billion and USD 1 000 billion, it has fluctuated between just under 20% and around 30% over the past decade. For countries with a GDP below USD 300 billion, foreign currency debt has been around 40% of total outstanding debt since 2018.

There were exceptions with some EMDEs with a GDP above USD 300 billion having more than one quarter of their outstanding bond debt denominated in foreign currency in 2024. These are Argentina, Chile, Colombia, Egypt, Romania, Saudi Arabia and Türkiye. In all of these countries, though, foreign currency bond debt accounted for half or less than half of the total outstanding in 2024. In contrast, all the 16 countries with more than half of their bond debt denominated in foreign currency had a GDP below 300 billion USD in 2024. Of these 16, 5 are LMICs, 5 are HICs, and the remaining 6 are UMICs, indicating that the reliance on foreign currency markets is not directly correlated with income, but rather with size.

One factor supporting the development of local currency bond markets in larger economies is their ability to more easily cultivate a diverse domestic investor base. Larger economies often have local investors with a wider range of investment horizons and risk profiles, enabling deeper and more resilient local markets (Figure 3.3, Panel B). Such an investor base includes, for instance, commercial banks and money market funds, which typically buy shorter-dated bonds, and pension and insurance companies, which typically buy longer-dated bonds. Institutional investors with a long-term investment horizon might be particularly useful to alleviate selling pressures in times of crisis as they do not seek short-term gains but rather to maximise long-term returns.

A key element of investor diversification is not being too reliant on any one group of investors, especially foreign investors. Countries that predominantly rely on foreign investors, even if their debts are mainly denominated in local currency, may face the "Original Sin Redux" risk (Carstens and Shin, 2019[8]), which occurs when foreign investors rapidly withdraw from a market during crises. Such withdrawals occurred during both the global financial crisis and the COVID-19 pandemic (Onen, Shin and von Peter, 2023[9]) and are triggered by the combined and reinforcing effects of duration (bond price sensitivity to interest rate changes) and currency risks to bond prices.

Over-reliance on local banks as investors for sovereign bonds can also pose risks due to the sovereign-bank nexus. The exposure of domestic banks to sovereign debt in EMDEs has grown rapidly over the last decade (Dunz et al., 2024[10]). When domestic banks hold large amounts of domestic government debt, and, thus, the public and financial sectors are closely linked, the stress in one can destabilise the other. A drop in sovereign bond values weakens the financial institutions that hold them, increasing financial stability risks. If these institutions require government support, the resulting fiscal strain can further undermine confidence in public finances, negatively affecting bond prices and creating a self-reinforcing cycle.

Lengthening the debt portfolio reduces refinancing risks by spreading repayment obligations over a longer period, making it less likely that a country will need to roll over large amounts of debt during unfavourable market conditions. This approach also decreases exposure to short-term interest rate volatility, providing greater stability in debt servicing costs. For EMDE sovereign issuers, longer maturities can help ensure smoother access to financing during periods of financial stress, as they reduce the frequency of market exposure and increase investor confidence in the country's debt sustainability.

The weighted average term to maturity (ATM) of the outstanding sovereign debt has been shorter in LICs and LMICs than in UMICs and HICs since the early 2010s (Figure 3.4, Panel A). Since 2015, the ATM in LICs has varied between three and five years. In LMICs, it has remained between five and six years since 2017, while in UMICs and HICs, it has exceeded seven years since 2015 and 2019 respectively. All these figures are below the average ATM in OECD countries of around eight years in 2024 (see Chapter 1).

Figure 3.4. EMDEs weighted average term to maturity of outstanding bond debt

Since the mid-2010s, EMDEs have extended debt maturities, but lower-income countries still lag behind higher-income peers

Note: UMICs* exclude China and LMICs* exclude India. India is excluded from this figure as it accounts for over half of LMICs’ outstanding bond debt and skews the analysis with its unusually high weighted average term-to-maturity of over 15 years. The ATM of LICs' outstanding debt in foreign currency began in 2015 as only a very limited amount of these countries’ foreign currency bonds was outstanding before that year. Values in all Panels are weighted averages based on outstanding bond debt.

Source: LSEG and OECD calculations.

The ATM of sovereign bond debt increased across all income groups before the pandemic but declined after 2022, except in LICs where it continued to rise slowly. Most EMDEs took advantage of favourable funding conditions over the past decade to lengthen the maturities of their outstanding debt. However, following the tightening of monetary conditions in advanced economies after 2022, the ATM of sovereign debt in these countries began to decline, reversing a long-term trend of lengthening maturity.

The decline in LICs’ ATM in the early 2010s does not necessarily reflect an increase in their risk profile, as part of this decline was the result of an increase in the proportion of debt denominated in local currency. The ATM for debt denominated in foreign currency is consistently higher than that for debt in local currency across all income groups (Figure 3.4, Panel B).4 Due to currency risk, the demand for long-dated bonds in EMDEs’ local currencies is lower than that of foreign currency debt. Therefore, as countries issue more debt in local currency, they tend to shorten their ATMs. In this case, countries are reducing their foreign currency exposure while slightly increasing their refinancing and interest risk exposure, thus likely reducing the overall risk exposure of their debt portfolios.

EMDEs have made progress in developing local currency bond markets and extending debt maturities. However, progress has been unequal across larger and smaller issuers, and lower and higher income countries. Larger issuers tend to have more developed local currency bond markets, supported by broader domestic investor bases that improve market depth and resilience, while smaller issuers lag behind. Further, LICs and LMICs have shorter ATMs than UMICs and HICs, making them more vulnerable to refinancing and interest rate risks. Strengthening local currency bond markets and lengthening their debt portfolios remain critical for EMDEs to help mitigate external shocks.

Borrowing costs and market access

Monetary tightening cycles in advanced economies, particularly in the United States, can have significant spillover effects on global bond markets. These effects often include increased yields across the curve, depreciation of EMDE currencies and elevated credit risks. Borrowing costs are pressured not only by higher yields in both local and foreign markets but also by the impact of currency depreciation on liabilities denominated in foreign currencies. Together, these factors can restrict market access for vulnerable issuers and, in some cases, lead to defaults.

Spillovers occur because hikes in US dollar yields, coupled with US dollar appreciation, typically increase the cost of imports priced in local currencies, raising inflation uncertainty and premiums and compelling central banks in EMDEs to increase interest rates to control prices. Additionally, in scenarios of slower global economic growth, foreign investors—crucial to the sovereign issuers’ investor base in EMDEs for both foreign and local currency debt, as seen in the last section—may favour issuers with higher credit ratings, a phenomenon known as the "flight to quality."

US monetary tightening since 2022 has impacted EMDEs heavily, with a high policy rate in the US coinciding with elevated global inflation, appreciation of the US dollar and slower economic growth. In this monetary tightening cycle, the rise in yields in the USD 2-year and 10-year benchmarks has been the largest since at least 1994, with the US dollar index rising to a near 25-year peak. The current economic environment is also marked by relatively slow global growth prospects and relatively high macro-economic and geopolitical uncertainties, which can contribute to supply shocks and higher inflation (OECD, 2024[11]). Empirical evidence shows that spillovers of US tightening cycles to EMDEs are intensified when the US dollar appreciates and global inflation expectations increase (Caballero and Upper, 2023[12]).5

Although several central banks in advanced economies started loosening monetary policy in 2024 (see Chapter 1), long-term rates remain elevated and have increased in some countries, including the United States. Long-term rates are now at or near their highest levels for 15 years in a number of advanced economies. In this environment, funding conditions remain tight and are projected to remain so this year.

These worsening funding conditions come in the aftermath of the COVID-19 pandemic, during which EMDEs experienced a significant increase in debt burdens. EMDE debt-to-GDP ratios were 47% in 2000 and 35% in 2007.6 By the end of 2021, just before the US Federal Reserve’s first policy rate increase in Q1 2022, this ratio had reached 64%. This elevated indebtedness can lead to greater market pressures and limit overall fiscal capacity.

EMDE borrowing costs have surged since 2022, hitting lower income and high-risk countries the hardest

The typical first consequence of global monetary tightening cycles for sovereign issuers is the rise in borrowing costs, as evidenced by yield movements in the primary markets (i.e. yield at issuance). This increase can limit fiscal space, as more government revenue is diverted to interest payments, thereby elevating the levels of primary balances necessary for governments to maintain sustainable debt-to-GDP trajectories.

The fundamentals influencing EMDE sovereign bond yield movements depend on whether they are denominated in local or foreign currency. Yields from sovereign bonds denominated in local currency typically serve as the benchmark for that currency, effectively acting as the best proxy for the nominal risk-free rate of return. This rate of return comprises inflation compensation, a real rate of return, a term premium (to compensate investors for the future uncertainties of inflation and yields), and credit risk to a limited extent.

Comparing nominal yields is only meaningful when bonds are denominated in the same currency; real rates are more indicative of the actual borrowing costs and fiscal constraints governments face in local currency debt. Due to significant differences in inflation across currencies, countries may experience widely varying nominal and real returns—some with double-digit nominal yields yet negative real returns and others with single-digit nominal yields but positive real returns. From a fiscal sustainability perspective, debt-to-GDP ratio dynamics are influenced by real rather than nominal rates. For example, high nominal yields may not be problematic for debt sustainability if real yields are low or negative. In contrast, movements in real rates can significantly alter debt-to-GDP trajectories even if nominal yields remain stable.

Primary market estimated real yields on sovereign bonds issued in local currency rose from negative levels to nearly 4% in EMDEs (excluding China) between 2020 and 2024 (Figure 3.5, Panel A).7 This level is comparable to the peak real yields observed in EMDEs' local currency bond markets in the mid-2010s and during the aftermath of the global financial crisis. In OECD countries, real yields, although rising, remain significantly lower, at around 2%—less than half the level in EMDEs (see Chapter 1). This rise in borrowing costs is particularly significant, as most market-based financing in EMDEs relies on local currency bond markets.

Although real yields at issuance have increased across all income and credit rating groups, they remain higher in LICs and speculative-grade economies. In HICs, yields shifted from negative territory in 2018-21 to over 2% in 2024 (Figure 3.5, Panel A). In UMICs and LMICs, they increased from negative territory in 2020 to 4% and 3%, respectively, in 2024. In LICs, real yields rose from around 3% in 2020 to more than 7% in 2024, significantly higher than other income groups. At the same time, investment-grade countries’ real yields at issuance were around 1% in 2024, while they rose to nearly 4% in non-investment grade countries, a level also seen in the aftermath of the global financial crisis.

Figure 3.5. EMDEs primary market yields in local currency and USD

EMDEs yields at issuance have risen in both local and foreign currency markets

Note: IG and Non-IG refer to investment and non-investment grade, respectively. EMDEs* exclude China. The figures comprise a sample of bonds with primary market yield to maturity available in LSEG. All values are averages weighted by issuance amounts in the respective instrument by country. Real rates of returns are estimations as they can only be precisely computed for matured bonds. These were estimated by adjusting nominal yields from a sample of primary market issuance for realised and projected inflation from 2007 to 2029. Bonds excluded from Panel A are those maturing after 2029, with no available yield-to-maturity at issuance data in LSEG and from China and countries with relatively high inflation, namely Argentina, Lebanon, Türkiye, Venezuela and Zambia. In Panel B, China was excluded as it is not a frequent issuer of USD-denominated bonds, and LICs’ data is sparse due to the scarcity of issuance in USD-denominated bonds for this income group.

Source: LSEG for bond yields and IMF WEO for inflation, OECD calculations.

Outliers include China, where real rates fell to nearly zero in 2024 amid a struggling real estate market; Egypt, where real rates rose by four percentage points (from nearly 0% in 2021 to 4% in 2024) due to heightened economic distress; and Ukraine, where real rates exceeded 8% in 2024 amid the continuing war. Several LICs and LMICs also experienced sharp increases approaching or exceeding 5% in real yields. These include Kenya, Mali and Nigeria—all in Sub-Saharan Africa (SSA), with credit ratings indicating high risk.8

For EMDE sovereign bonds denominated in USD, primary market yields rose from around 4% in 2020 to over 6% in 2024 (Figure 3.5, Panel B). This increase was slightly smaller than that of the US 10-year benchmark yield, which climbed from around 1% in 2021 to over 4% for much of 2023 and 2024. As a result, spreads narrowed slightly on average, as the US benchmark yield rose more than EMDE USD-denominated debt yields. However, yields in USD-denominated debt remained at their highest point since 2011 (excluding 2023), while borrowing costs in foreign currency-denominated debt extend beyond yields and also include the effects of currency appreciation on coupon and principal repayments (see Box 3.2).

Non-investment grade issuers faced their highest USD borrowing costs in more than a decade, with weighted average costs of 7% to 8%, nearing the 10% threshold, a level indicative of market distress.9 Precisely, yields at issuance between 2021 and 2024 increased from 6% to over 8% for EMDEs with high-risk credit ratings,10 from 4% to over 7% for countries with a speculative BB grade, and from 3% to over 5% for investment-grade countries.

LMICs faced higher borrowing costs for USD-denominated bonds than UMICs and HICs. In 2024, LMICs' borrowing costs exceeded 7%, while those from UMICs and HICs remained below 7% and 6%, respectively. This trend of lower income countries having higher borrowing costs for USD-denominated bonds is common—this was the case in all years since 2007 except in 2023 and in 2010-13.

Box 3.2. The higher cost of USD-denominated debt for countries with low credit ratings

The cost of USD-denominated debt in EMDEs includes two main components: nominal yield and currency effect. Yields on EMDEs’ local currency debt are generally higher than on USD-denominated debt as a currency risk premium is priced in higher macro-economic instability and inflation in EMDEs. However, since the USD has tended to appreciate against EMDE currencies over time, coupon and principal payments typically become costlier when converted to local currencies (the currency effect).

Owing to lower nominal yields, USD-denominated debt’s carry costs are often lower than that of local currency debt. However, its total costs are often higher (Figure 3.6, Panels A and C). Calculating the total cost of foreign currency debt in local currency before maturity is not possible because the value of the principal and coupons in local currency on the due date is uncertain. Consequently, calculations rely on current data estimates, which can underestimate future expenses with EMDE currencies typically depreciating over the long-term.

This is exacerbated by foreign currency debts often having longer maturities (Figure 3.4), and often highly volatile foreign exchange (FX) rates. Over the lifespan of a bond, FX rates can fluctuate significantly, particularly in high-risk credit countries (Figure 3.6, Panels B and D). These countries saw the value of their currency fall by nearly 80% against the US dollar from 2000 to 2024, with the cost of redeeming the principal of a 20-year USD bond issued in the early 2000s being five times higher in 2024.

When this is factored into the total cost, issuing USD-denominated debt can become prohibitively expensive in certain conditions, especially for high-risk countries. In this group, the median of the estimated FX-adjusted annual yield to maturity of USD-denominated debt exceeded 15% during this tightening cycle. This underscores the link between currency depreciation and debt crises in vulnerable countries (Schuster et al., 2024[13]), and the stabilising role of local currency bond markets.

Figure 3.6. Cost of fixed-rate bond debt and EMDEs currency indexes

The cost of foreign currency debt is typically more volatile and can greatly exceed that of local currency debt

Note: UMIC* excludes China. All cost measures are median values for each group. Carry costs for local currency (LC) debt are the stock-weighted average yield to maturity. For foreign currency (FC) debt, carry costs are the yield to maturity adjusted by the FX rate ratio from issuance to year-end. Total costs of matured FC debt are the internal rate of return of cash flows converted to local currency at each cash flow approximate date, with each year including only securities that matured in that year. The currency index covers only sovereign issuers, weighted by each country's GDP.

Source: LSEG and OECD calculations.

The higher borrowing costs for non-investment grade and lower income countries in 2023-24 reflect a significant overlap between the two groups. Of the 42 EMDEs that issued USD-denominated bonds during this period, 14 were lower income countries and 16 had high-risk credit ratings. Ten of the countries belonged to both categories, as lower income with high-risk ratings. Among the remaining four lower income countries, three had a BB rating—non-investment but above high risk, while only one, the Philippines, held an investment-grade rating. As a result, high-risk issuers accounted for more than two-thirds of all lower income countries that accessed these markets. By contrast, high-risk issuers represented around 30% of UMICs and only 10% of HICs that issued USD-denominated bonds during this period.

Fourteen countries issued USD bonds with a yield to maturity above 8% in 2023-24.11 Nine of those are LMICs, seven of which are from SSA, one is from Latin America and the Caribbean (LAC) and the last one, Uzbekistan, is from the Middle East and Central Asia (MECA). The remaining issuers include four UMICs, namely Colombia, Costa Rica, Mongolia and Türkiye, and one HIC, Panama.

The predominance of countries in the SSA region among those with high yields can be explained, to some extent, by this region’s generally lower transparency in budget processes, less developed financial systems and public institutions, and a larger informal sector (Gbohoui, Ouedraogo and Some, 2023[14]). In fact, the region’s average yield at issuance of USD-denominated bonds approached nearly 8% in 2024, while this rate remained between 5% and 7% in all other regions that year.

For other countries, the underlying reasons for these high-yield issuance vary. For example, in Türkiye, the cost of issuing USD-denominated bonds exceeded 9% in 2023, amid restrictive monetary policy with inflation reaching nearly 70%, and an earthquake that impacted economic output and fiscal policy (OECD, 2024[15]). In Mongolia, yields hit nearly 9% in the same year, influenced by its dependence on mining with reduced exports to China, high inflation and fiscal challenges (World Bank, 2023[16]). Colombia issued USD-denominated bonds with yields around 8% at a juncture of modest growth, high inflation, fiscal risks, and rising debt (OECD, 2024[15]). Panama’s credit rating outlook deteriorated amid growing fiscal risks (Moody's, 2024[17]).

More lower income and high-risk countries borrowed from foreign markets in 2024 compared to 2022-23, but net borrowing from these markets remained low or negative

Primary market yields and effective interest rates reflect the true borrowing costs for sovereign issuers with market access. However, they do not include information on countries that were unable to issue due to unfavourable market conditions, like prohibitively high secondary market yields.12 As such, primary market yields only represent countries whose economic and fiscal conditions allow access to markets at non-prohibitive costs. An analysis limited to primary market rates is then skewed by survivorship bias.13 Secondary market yields, however, might capture a wider spectrum of investor sentiment across outstanding bonds, providing insights into the creditworthiness of countries, including those prevented from issuing new bonds due to adverse funding conditions.

Data from the end of 2024 on the secondary market yields of EMDE bonds denominated in US dollar indicates the highest borrowing costs since 2015, with highly unfavourable funding conditions for countries in the SSA region, lower income countries and high-risk countries (single B and below) (Figure 3.7., Panel A). Median yields across countries have risen from approximately 3‑4% in 2021 to 6-7% in 2024 in EMDEs from Asia, Europe, LAC and MECA. This three-percentage point increase is of the same magnitude as the increase in the US 10-year benchmark during the period. In the SSA region, however, this rate rose by four percentage points, from around 6% to nearly 10%.

Figure 3.7. Market yields of USD bonds and number of EMDEs issuing in foreign markets

Secondary market yields have increased since 2022, prompting some EMDEs to avoid issuing foreign markets

Note: Panel A covers a sample of nearly 600 USD-denominated bonds from 71 countries with maturities of 2 to 15 years. Yields are median yields across countries. This panel begins in 2015 due to data limitations. In 2024, data availability declined sharply. To maintain continuity, the 2023 rate was used for 28 countries where no secondary market rate was available in 2024. LICs were excluded as this income group has limited access to foreign markets.

Source: LSEG and OECD calculations.

The sharp rise in secondary market yields for USD-denominated bonds in the SSA region, and amongst lower income and issuers in high-risk of default or with lower credit rating, is partly driven by 10 countries that belong to all three groups simultaneously.14 In 2023-24, sovereign bonds from these countries traded at yields above 8%. In contrast, outside SSA, only seven lower income countries with high-risk ratings had secondary market rates available in 2023-24.15

High borrowing costs in US dollar have prompted some EMDEs to avoid issuing in foreign markets since 2022. The number of EMDE sovereign issuers in foreign markets, which fluctuated between approximately 40 and 50 in 2015-21, declined to 29 in 2022 (Figure 3.7., Panel B). It increased again in 2023 and reached 42 countries in 2024, close to the pre-pandemic average.

However, the reversal in the decline was uneven, with the number of high-risk countries issuing in foreign markets remaining below 2021 pre-tightening levels in 2024. Between 2015 and 2021, an average of 20 high-risk countries issued in foreign markets. This number dropped to 9 in 2022 and 8 in 2023, before increasing to 13 in 2024. This remains below the levels seen in any year between 2015 and 2021.

Despite a rise in the number of EMDEs issuing in foreign markets in 2024, net borrowing from these markets remained low for UMICs and LMICs.16 From 2015 to 2019, UMICs and LMICs had an average annual net borrowing from foreign markets of approximately USD 30 billion and USD 20 billion, respectively (Figure 3.8, Panel A). However, in 2022, both groups experienced net repayment of around USD 5 billion. Although net borrowing rebounded in 2023, returning to positive territory, LMICs saw a renewed decline in 2024, turning negative once again. Meanwhile, UMICs maintained positive net borrowing in 2024, but at only a quarter of pre-pandemic levels.

Figure 3.8. EMDEs net borrowing from foreign markets

Net borrowing from foreign markets remained low or negative for LMICs and high-risk countries since 2022

Note: Panels begin in 2015 due to data limitations.

Source: LSEG and OECD calculations.

High-risk countries saw the most pronounced decline in net borrowing from foreign markets, with levels remaining negative each year since 2022. In contrast, net borrowing from foreign markets by investment-grade EMDEs in 2024 exceeded pre-pandemic averages. Non-investment grade BB-rated countries maintained positive net borrowing from foreign markets in aggregate over the period 2022-24, though volumes remained below pre-pandemic levels and values in 2022 were negative. This indicates that foreign investors avoided high-risk countries amid heightened macro-financial volatility and geopolitical risks, but were willing to invest in low-risk countries.

In 2024, the number of HICs and UMICs with negative net borrowing from foreign markets declined to around pre-pandemic levels (Figure 3.8, Panel B). Meanwhile, this number increased in 2024 for LMICs and remained stable at a high level in high-risk countries. Ten different LMICs or LICs had negative net borrowing in foreign markets in aggregate in 2022-24.17 This shows that the decline in net borrowing in foreign markets by LMICs and high-risk countries was widespread (not concentrated among a few large issuers), suggesting reduced investor appetite and/or reluctance by sovereigns to increase issuance in foreign markets amid adverse funding conditions, which would lock-in high prevailing rates in US dollar and lead to further exposure to currency risk through the life of the bond.

Credit rating developments

An uneven recovery in credit ratings

The number of rating upgrades of EMDEs exceeded the number of downgrades in 2024, for the first time since 2019 (Figure 3.9, Panel A). During the pandemic, in 2020-21, EMDEs received 20 upgrades and 123 downgrades; while in 2022-23, they received 42 upgrades and 73 downgrades. In 2024, there were 52 upgrades and 21 downgrades, a significant improvement, with three former high-risk countries (Albania, Costa Rica and Jordan) improving their ratings to the category Speculative Grade BB.

Improvements in credit quality were, however, distributed unevenly with respect to countries’ income levels. In HICs, UMICs and LMICs, around 75% of all credit rating updates were upgrades in 2024. In contrast, LICs experienced no upgrades at all, but three downgrades for two countries: Uganda (Fitch and Moody’s) and Niger (Moody’s). Therefore, while worsening credit ratings following the pandemic and the subsequent monetary tightening reversed in 2024, this trend was not observed in LICs.

The number of countries in very high-risk or in default remained at a 25-year high at 10 in 2024,18 representing around 10% of EMDE sovereign issuers assessed (Figure 3.9, Panel B). This number has been constant since 2022, when it rose from 3 in 2021. Of these 10 countries, 2 are LICs, 4 are LMICs and 4 are UMICs. Regionally, 4 are from SSA, 2 from Asia and Europe each, and 1 from the LAC and MECA regions each.19 This record high number of EMDEs in very high-risk or in default comes at a time when global debt restructuring has become more complex (Box 3.3).

In contrast to the debt crises of the 1980s and 1990s, most of the countries in default are, however, relatively small in terms of GDP and outstanding debt, limiting the significance of the defaults with respect to the global financial system. During the tightening cycles of the 1980s and 1990s, EMDEs with a combined GDP in 2023 values of USD 15 trillion defaulted on at least part of their debt. As of 2024, the combined GDP of countries in very high-risk or in default has only slightly exceeded USD 1.1 trillion.20 Despite accounting for only around 1% of global GDP, these countries have a population of 315 million, or 4% of the global population.

Box 3.3. Debt restructuring challenges amid a more diverse creditor base

A record number of EMDEs are currently facing default or are at a very high risk of default. Multiple global macro-financial headwinds have weakened their shock absorption capacity. This comes as the global debt restructuring process has become more complex. Still, in recent years, important advances at the international level have been made to manage sovereign debt restructurings more efficiently.

Sovereign defaults and restructurings are costly for debtors and issuers and are generally considered a last-resort option. Debt restructuring requires reaching an agreement between the debtor and various creditors, who all have different expectations, portfolios and exposures to risk. For the debtor, it can lead to a loss of, or at least very restricted, market access during the time between the default and its resolution and increase the cost of issuing debt once access is regained. For creditors, restructuring means either a modification in the payment terms or, in more extreme cases, a reduction in the principal amount of the debt — commonly known as a haircut. An empirical study examining sovereign debt restructuring over 200 years found that on average, two restructurings have been necessary to resolve a sovereign debt crisis, with a default period of eight years and haircuts of around 45% of the principal.

Sovereign debt restructuring has become increasingly complex over the last two decades due to a higher level of defaulted debt and a much broader creditor base. The private sector and China as a creditor are playing increasingly important roles. Of the total defaulted sovereign debt (including non-bond debt), which reached USD 530 billion in 2023 compared to an annual average of around USD 230 billion in 2011-20, 15% was owed to Paris Club countries in 2023, down nearly 30% from 2011. Simultaneously, the share of debt owed to China rose from zero in 2011 to around 9% in 2023, while the share of private creditors rose from around one-quarter to nearly half in the same period. Thus, initiatives aimed at broad debt restructuring now require coordination with a much more varied creditor base, leading to lengthier and more arduous negotiations and higher uncertainty.

As a consequence, multilateral initiatives have been developed to adapt debt restructuring to this new environment. The G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (Common Framework) was set up in 2020 to provide LICs with orderly and coordinated debt restructurings with broad creditor participation with G20, Paris Club and other official creditors in a single committee. The restructuring process under the Common Framework is closely intertwined with the implementation of an IMF program to help achieve debt sustainability. As of December 2024, four countries have applied to the Common Framework: Chad, Ethiopia, Ghana and Zambia.

To strengthen multilateral co-operation and coordination, the Global Sovereign Debt Roundtable (GSDR) was established in 2022 by the IMF, the World Bank and the G20. The GSDR aims to enhance debt transparency, accelerate restructuring processes, and address challenges in resolving sovereign debt crises. Moreover, the IMF revised the rules governing its role in debt restructurings, explicitly taking China’s importance as a creditor into account. These policy innovations can increase the efficiency and timeliness of future restructurings. Despite these positive developments, important issues, such as the hierarchy of claims in debt restructuring, remain areas where greater multilateral coordination and standard setting are necessary. Furthermore, the Common Framework is only applicable to LICs, with a comparable framework for countries with higher income levels missing.

Source: Beers, D. et al. (2024[18]), “BoC–BoE Sovereign Default Database: What’s new in 2024?”, BoC–BoE Staff Analytical Note, https://doi.org/10.34989/san-2024-19; Makoff, G., et al. (2025[19]), “Sovereign Debt Restructuring with China at the Table: Forward Progress but Lost Decade Risk Remains.”, M-RCBG Associate Working Paper Series No 248, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/working.papers/Final_AWP_248_0.pdf.; and von Luckner, C. et al., (2023[20]), “Sovereign Debt: 200 years of creditor losses”, 24th Jacques Polak Annual Research at the IMF, https://www.econstor.eu/bitstream/10419/283945/1/1881643514.pdf.

Despite the overall positive rating dynamics in 2024, the share of investment grade countries continued its gradual long-term downward trend, falling from 23% in 2023 to 22% last year (Figure 3.9, Panel B).21 Therefore, despite the absence of widespread macro-economic instability and debt crises, and the increasing issuance of local currency debt, many EMDEs have failed to maintain their investment grade ratings. At the same time, the share of countries with credit ratings corresponding to high risk (single B to CCC) decreased from 47% to 44% in 2024, after reaching a high of 56% in 2021.

Lower income countries tend to have lower ratings, with all LICs currently rated either (very) high risk or default (Figure 3.9, Panel C). This long-standing trend underlines the difficulties of weak economic fundamentals and of accessing market finance at favourable rates. The picture is similar for LMICs, 75% of which are rated single B and below. Conversely, in 2024, no single HIC faced default or was at a very high risk of default, while more than half of UMICs had an investment grade.

Figure 3.9. EMDEs credit rating changes and share of countries by credit rating

Upgrades outnumbered downgrades in EMDEs in 2024 for the first time since 2019, slightly reducing the share of high-risk countries, though lower-income economies remain predominantly high-risk

Source: LSEG and OECD calculations.

Investment grade issuers account for a higher share of EMDEs debt markets

While the share of EMDEs with investment grade has been declining, their share of EMDE outstanding bond debt reached a 25-year high in 2024. Investment grade EMDEs account for nearly 80% of outstanding EMDE sovereign debt, up from about 20% at the start of the 2000s (Figure 3.10, Panel A). Even when focusing solely on debt issued in international markets, excluding the high local debt of large investment grade economies such as China and India, the figure remains close to record highs at around 50% (Figure 3.10, Panel B).

Meanwhile, the proportion of outstanding debt from sovereign issuers with a credit rating corresponding to (very) high risks or default (single B and below) has reached multi-year lows for both total debt and foreign debt. This record-high number of high-risk EMDEs, in conjunction with their record-low share of outstanding debt, is the result of increased issuance levels of investment grade EMDEs over the last decades, and especially since 2020.

Figure 3.10. EMDEs outstanding debt by market and credit rating

The proportion of outstanding EMDE debt from investment-grade sovereign issuers has reached record highs

Note: Although the chart for local bond markets is not provided, its trend mirrors those of both local and foreign markets, as local bonds represent nearly 90% of the total outstanding debt stock as of Q1 2024. IG and SG refer to investment and speculative grades, respectively.

Source: LSEG and OECD calculations.

A cause for concern is the proportion of bond debt in foreign markets from EMDEs in very high risk or in default, which remained at 2% in 2024, after increasing from zero in 2016 to approximately 3% in 2022 (this considers both local and foreign markets). In foreign markets, this share rose from virtually zero in 2016 to 11% in 2022 and remained at 8% in 2024.

As outlined in Box 3.3, the debt restructuring landscape for countries is now more complex. Some smaller countries that have concurrent credit and climate risks have turned to debt-for-nature swaps, with several deals since 2022 helping to restructure record amounts of debt (Box 3.4).

Box 3.4. Debt-for-nature swaps in EMDEs

Debt for nature swaps (DFNs) work through an exchange between debtor and creditor, with a portion of a sovereign’s debt retired or restructured, conditional on the reduction in debt burden being partly allocated towards nature conservation. The most common forms of DFNs are bilateral and multilateral swaps (IMF, 2024[21]). Bilateral swaps involve reallocating debt service cash flows, principal reductions, or debt cancellation by the creditor. Multilateral swaps secure buyback funding through a third party (e.g. NGOs and MDBs), which may provide credit enhancement, concessional loans, or retire sovereign debt entirely.

DFNs have taken place in more than 40 countries since the very first transaction in 1987, but they have rarely exceeded USD 20 million in deal size. They are neither a recent innovation nor have they become more popular over time. On average, 10 deals took place annually in the 1990s, compared to less than two a year since 2010 (Figure 3.11, Panel A). Although the frequency has decreased, average deal size has increased notably in the 2020s, at approximately USD 713 million (Figure 3.11, Panel B). Larger recent transactions include Ecuador in 2023 (USD 1.6 billion) and El Salvador in 2024 (USD 1 billion).

Among EMDEs, the pool of countries with concurrent credit risk and climate vulnerability issues is deep, particularly amongst lower income countries, where economic growth can be highly sensitive to climate events. A DFN can, in principle, help to optimise a country’s debt portfolio, generate funds for climate programmes, and reduce the risk of costly comprehensive debt restructurings. DFNs can also have positive spillover effects, such as improvements in the credit of the sovereign due to debt restructuring. For example, Belize’s S&P rating was upgraded after a multilateral swap in 2021.

Without greater creditor concessions or third-party involvement, though, the value and scalability of DFNs remain limited. High execution costs that stem from instrument complexity and the need for cross-institutional coordination, and extensive monitoring, tend to prolong implementation and ultimately reduce the net debt relief achieved. A swap is only efficient when its volume offsets these costs and the country's debt is trading well below par beforehand. However, except for a few recent cases, volumes have generally been insufficient for DFNs to serve as a major debt management or restructuring tool.

Enhancing instrument structure and increasing Multilateral Development Banks' involvement can improve DFN usability, as they facilitate efficiency by providing credit guarantees, risk insurance, monitoring, and technical support, fostering necessary economies of scale.

Figure 3.11. Number of debt-for-nature swaps deal and sizes

The number of debt-for-nature swaps per decade has been declining, but the average deal size has increased

Note: Panel B refers to averages on the value of debt to be restructured for 129 deals.

Source: LSEG, Notre Dame Global Adaptation Initiative (ND-GAIN), OECD data and calculations.

Refinancing outlook and policy implications

High-risk and low-income issuers have higher short-term refinancing needs

Despite recent reductions in inflation, global funding conditions are expected to remain unfavourable. Inflation remains above central bank targets in many advanced economies and EMDEs, with disinflation progressing more slowly in recent months. Thus, monetary policy will need to remain prudent, with carefully judged policy rate reductions (OECD, 2024[4]). Additionally, high borrowing needs and quantitative tightening in advanced economies have significantly increased the supply of bonds to be absorbed by markets. Geopolitical tensions also remain elevated, posing potential risks to global trade, which could impact the outlook for global growth and inflation. Under these conditions, borrowing costs are likely to remain high for some time.

Against this backdrop, almost USD 4.5 trillion of sovereign bonds, corresponding to nearly 40% of the EMDE bond debt stock as of December 2024, will mature between 2025 and 2027. Additionally, 40% of that amount corresponds to bonds issued before or in 2021, a period of more favourable funding conditions. As a result, refinancing this debt will likely lead to an increase in interest payments.

Figure 3.12. EMDEs maturity composition of debt and average primary and secondary market yields for all bonds

A significant share of outstanding bond debt will mature within three years amid wide yield gaps between primary and secondary markets for higher-risk issuers

Note: This figure covers a sample of nearly 8 700 bonds from 95 countries. Both the maturity composition and the yields are weighted averages calculated based on the outstanding amounts of the corresponding debt. Due to the unavailability of primary and secondary market yields for all maturing bonds, the values presented are a weighted average of those bonds with the available secondary market as of 2024 or the closest year up to 2022. These yields are shown only for their relative differences, representing an average across bonds in different currencies and nominal terms. Four countries with disproportionately high nominal yields were excluded from the yield analysis.

Source: LSEG and OECD calculations.

Low income and high-risk countries (graded single B or below), two significantly overlapping groups, are especially vulnerable. In LICs, the share of bond debt maturing in 2025 is around 25%, and in high-risk countries, it is close to 30% (Figure 3.12). Meanwhile, the share of the outstanding debt of other income groups that matures in 2025 averages less than 15%. Over the next three years (i.e. 2025-27), half of the debt of low income and high-risk countries is expected to mature, compared to nearly 40% in EMDEs as a whole.

A sample of bonds maturing over the next three years shows that secondary market yields are higher than their yields at issuance, particularly in non-investment grade countries and UMICs. For non-investment grade countries, secondary market yields on maturing debt often exceed 10%, and their averages are higher than the average rates of the maturing debt in all three years (2025, 2026 and 2027). Thus, countries refinancing this debt in the market will likely face a significant rise in borrowing costs, straining public finances over the life of the new bonds.

Twenty-four EMDEs will see more than half of their outstanding bond debt mature by 2027.22 Fifteen of these countries had a credit rating corresponding to high-risk or lower at the end of 2024. This group includes nine countries with debt-to-GDP ratios above 60%: Argentina, Brazil, Grenada, Guinea-Bissau, Lao People’s Democratic Republic, Namibia, Pakistan, Togo and Yemen.23 In all 24 countries except Albania, Bosnia Herzegovina, Grenada, Kuwait, Lao People’s Democratic Republic, Namibia and Seychelles, over 80% of the bond debt maturing over the next three years is denominated in local currency. This high share of local currency debt maturing over the next three years reflects these countries’ short maturity profile - the ATM of all 24 except Namibia is close to or below four years.

A short maturity profile for local currency debt raises refinancing and interest rate risks. For sovereign issuers with a short maturity profile, when conditions worsen, interest payments rise quickly as a big portion of the debt is refinanced under higher rates. Thus, they start to pay higher interest payments less gradually than the issuers with a longer maturity profile.

This explains why secondary market yields on maturing bonds over the next three years tend to be close to their issuance yields in LMICs and LICs. Lower income countries tend to have a shorter debt profile and, thus, much of the local currency bonds have already been refinanced under higher rates. This differs from HICs, UMICs and, especially, OECD countries, where a larger share of the debt is yet to be refinanced at higher rates as they have a much longer maturity profile.

As foreign currency debt tends to have higher maturities, a lower portion of them have already been refinanced at higher rates. Around half of the outstanding local currency debt in EMDEs was issued in 2022-24, already reflecting, to some extent, higher rates, compared to only one-third of the USD-denominated debt. Refinancing the latter, therefore, poses additional risks to EMDEs reliant on foreign markets.

Around 20% of the USD-denominated debt issued by EMDEs will mature by 2027, with high-risk countries facing a slightly higher share, exceeding 25% (Figure 3.13). At the same time, secondary market rates at the end of 2024 for the debt of this group are around two percentage points higher than their yield at issuance, suggesting a significant increase in interest rates when they are refinanced. These interest rate differentials are also large for LMICs, especially in 2026 and 2027, when they are close to five, affected by high differentials in Egypt and Pakistan.

Elevated refinancing needs, tight funding conditions and high debt levels are straining EMDE government budgets. As new debt is issued at higher rates, interest payments increase. While much of the local currency debt has already been issued at higher rates, the remaining amounts are still significant and borrowing costs will be sensitive to changing funding conditions. Higher debt servicing costs reduce fiscal space for EMDEs to invest in development, provide public services, and absorb future shocks amid geopolitical and macro-financial uncertainty.

For foreign currency debt, large bond redemptions amid local currency depreciation can force governments to either absorb substantial costs in local currency or refinance at higher rates, further increasing borrowing costs and foreign currency risks. In extreme cases, countries may default on maturing debt, and this dynamic has contributed to a near-record number of sovereigns with credit ratings equivalent to very high risk or near default over the past three years.

Against this backdrop, sovereign debt strategies, as part of wider structural, regulatory, and policy measures, should aim to enhance liquidity, attract investors, and deepen financial markets to reduce reliance on foreign borrowing over time (IMF and WB, 2021[22]). These measures should involve developing reliable benchmark yield curves, enhancing clearing and settlement systems, and promoting market making mechanisms.

Figure 3.13. EMDEs maturity composition of debt and average primary and secondary market yields for USD-denominated bonds

Around one fifth of EMDE foreign currency debt will mature by 2027, with 2024 market rates significantly higher than issuance yields in LMICs and high-risk countries

Note: This figure covers a sample of nearly 790 bonds denominated in US dollars in 66 countries. Both the maturity composition and the yields are weighted averages calculated based on the outstanding amounts of the corresponding debt. Due to the unavailability of primary and secondary market yields for all maturing bonds, the values presented are a weighted average of those bonds with the available secondary market as of 2024 or the closest year up to 2022. These yields are shown only for their relative differences, representing an average across bonds in different currencies and nominal terms. Four countries with disproportionately high nominal yields were excluded from the yield analysis.

Source: LSEG and OECD calculations.

Further development of local currency bond markets is crucial for ensuring sustainable and resilient sovereign financing

Of the nearly 100 EMDEs with sovereign bonds outstanding and a credit rating from one of the three main credit rating agencies, 73 have a GDP below USD 300 billion, as of the end of 2024. These countries accounted for around 90% of the EMDEs at (very) high risk or in default and just 40% of the EMDEs with an investment grade At the same time, only about one quarter of the countries with a GDP between USD 300 and 1 000 billion are at (very) high risk or in default. Conversely, of the eight EMDEs with a GDP above USD 1 000 billion, all except Brazil and Türkiye have an investment grade.

Many of these smaller economies have not developed their local currency bond markets. All 30 EMDE sovereign issuers whose foreign currency share of outstanding debt at the end of 2024 exceeded 30% were small countries (GDP below USD 300 billion), except Argentina and Türkiye. These countries comprise all 10 countries at very high risk or in default, except Niger. This shows a link between the development of local currency bond markets and the impact of the current global tightening cycle on debt sustainability.

In the past, when large EMDEs had not yet developed their local currency bond markets, they also struggled during global tightening cycles. In the 1980s, large EMDE issuers like Brazil, Mexico, and Peru either defaulted or underwent significant debt restructuring. By the late 1990s, this list included large countries such as Indonesia, Thailand, and the Philippines. None of these countries have defaulted or undergone debt restructuring since the global tightening cycle began in 2022, partly due to their local currency bond markets being more developed. In fact, the share of debt denominated in local currency exceeds 90% in all these countries, except Peru.

These countries have developed a more strategic approach to debt management to foster their local currency bond markets. Opportunistic debt issuance might favour foreign currency debt because, in the short term and under more favourable funding conditions, they may achieve lower costs and longer maturities. However, during times of distress, the costs of foreign currency debt spike dramatically in local currency for countries with lower credit ratings. Governments mainly earn revenues in local currency, so this mismatch can affect a country’s capacity to pay its debts, especially given the higher current refinancing needs.

For large EMDEs that developed their local currency bond markets, the main consequence of the current crisis is an increase in interest expenditures, pressuring government budgets and slowing development. With relatively high real rates in local currency bonds in EMDEs, the primary balance needed to stabilise the record-high post-pandemic debt-to-GDP ratios is higher. This reduces fiscal space for investments and expenditures necessary for development. However, this is much less harmful than the crises seen in past tightening cycles.

For smaller emerging market economies that lack developed local currency bond markets, tighter financial conditions not only raised local currency borrowing costs but also increased refinancing risks for foreign currency debt. These countries faced either the challenge of repaying debt in a currency that has likely depreciated against the US dollar, increasing costs substantially, or the need to refinance debt at higher rates, straining public finances in the long run. While these smaller economies account for a relatively small share of outstanding debt and global GDP, their debt distress could have significant social and political implications (Farah-Yacoub, von Luckner and Reinhart, 2024[23]).

The recent global tightening cycle underscores that the costs of not having developed local currency bond markets are high. Developing local currency bond markets is vital to build resilience against future global tightening cycles. The ability of large emerging market economies to rely on well-established local currency bond markets significantly mitigated the impact of the 2022-23 tightening cycle, helping to stabilise sovereign bond markets and limit defaults.

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[9] Onen, M., H. Shin and G. von Peter (2023), “Overcoming original sin: insights from a new dataset”, BIS Working Papers 1075, https://www.bis.org/publ/work1075.pdf.

[13] Schuster, F. et al. (2024), “Debt Surges—Drivers, Consequences, and Policy Implications”, IMF Working Paper WP/24/50, https://www.imf.org/en/Publications/WP/Issues/2024/03/08/Debt-Surges-Drivers-Consequences-and-Policy-Implications-545492.

[20] von Luckner, C. et al. (2023), “Sovereign Debt: 200 years of creditor losses”, 24th Jacques Polak Annual Research at the IMF, https://www.econstor.eu/bitstream/10419/283945/1/1881643514.pdf.

[16] World Bank (2023), “Mongolia’s Economy Continues to Pick Up, But Growth Remains Uneven”, Press Release 2024/024/EAP, https://www.worldbank.org/en/news/press-release/2023/11/28/mongolia-s-economy-continues-to-pick-up-but-growth-remains-uneven.

Annex 3.A. Methodology

Primary sovereign bond market data and country groupings

Primary sovereign bond market data are based on original OECD calculations using data obtained from the London Stock Exchange Group (LSEG), which provides international security-level data on new issues of sovereign bonds. The data set covers bonds issued by emerging market sovereigns in the period from 1 January 2000 to 31 December 2024 and includes both short-term and long-term debt. Short-term debt (“bills”) is defined as any security with a maturity less than or equal to 365 days but no less than 33 days, as bill issuance with a maturity less than 33 days are considered to be done for cash management purposes and excluded from calculations. Bonds issued by central banks that have no government budget financing purposes were excluded. The data provides detailed information for each bond issue, including the proceeds, maturity date, interest rate and currency structure.

This report's definition of emerging markets is consistent with the IMF’s classification of Emerging Market and Developing Economies (EMDEs) used in its World Economic Outlook. The regional definitions are also those used by the IMF, while the income categories used (high income, low income, lower middle income, upper middle income) are those from the World Bank as of 2024, which is based on GNI per capita levels. EMDE sovereign bond issuers are:

• High income countries (HICs) are: Bahamas (LAC), Bahrain (MECA), Barbados (LAC), Bulgaria (EMDEs Europe), Chile (LAC), Hungary (EMDEs Europe), Kuwait (MECA), Oman (MECA), Panama (LAC), Poland (EMDEs Europe), Qatar (MECA), Romania (EMDEs Europe), Russian Federation (EMDEs Europe), Saudi Arabia (MECA), Seychelles (SSA), Trinidad and Tobago (LAC), United Arab Emirates (MECA), Uruguay (LAC).

• Upper middle income countries (UMICs) are: Albania (EMDEs Europe), Algeria (MECA), Argentina (LAC), Armenia (MECA), Azerbaijan (MECA), Belarus (EMDEs Europe), Belize (LAC), Bosnia Herzegovina (EMDEs Europe), Botswana (SSA), Brazil (LAC), China (EMDEs Asia), Colombia (LAC), Costa Rica (LAC), Dominican Republic (LAC), Ecuador (LAC), El Salvador (LAC), Equatorial Guinea (SSA), Fiji (EMDEs Asia), Gabon (SSA), Georgia (MECA), Grenada (LAC), Guatemala (LAC), Indonesia (EMDEs Asia), Iraq (MECA), Jamaica (LAC), Kazakhstan (MECA), Malaysia (EMDEs Asia), Maldives (EMDEs Asia), Mauritius (SSA), Mexico (LAC), Moldova (EMDE Europe), Mongolia (EMDEs Asia), Montenegro (EMDEs Europe), Namibia (SSA), North Macedonia (EMDEs Europe), Paraguay (LAC), Peru (LAC), Serbia (EMDEs Europe), South Africa (SSA), Suriname (LAC), Thailand (EMDEs Asia), Türkiye (EMDEs Europe), Ukraine (EMDEs Europe), Venezuela (LAC)

• Lower middle income countries (LMICs) are: Angola (SSA), Bangladesh (EMDEs Asia), Benin (SSA), Bolivia (LAC), Cameroon (SSA), Cote Ivoire (SSA), Egypt (MECA), Ghana (SSA), Honduras (LAC), India (EMDEs Asia), Jordan (MECA), Kenya (SSA), Lao PDR (EMDEs Asia), Lebanon (MECA), Morocco (MECA), Myanmar (EMDEs Asia), Nicaragua (LAC), Nigeria (SSA), Pakistan (MECA), Papua New Guinea (EMDEs Asia), Philippines (EMDEs Asia), Senegal (SSA), Sri Lanka (EMDEs Asia), Swaziland (SSA), Tanzania (SSA), Tunisia (MECA), Uzbekistan (MECA), Viet Nam (EMDEs Asia), Zambia (SSA)

• Low income countries (LICs) are: Burkina Faso (SSA), Chad (SSA), Congo (SSA), Ethiopia (SSA), Guinea Bissau (SSA), Malawi (SSA), Mali (SSA), Mozambique (SSA), Niger (SSA), Rwanda (SSA), Togo (SSA), Uganda (SSA), Yemen (MECA).

A number of bonds have been subject to reopening. For these bonds, the initial data only provides the total amount (original issuance plus reopening). To retrieve the issuance amount for such reopened bonds, specific data on the outstanding amount on each reopening date for the concerned bonds have been downloaded separately from LSEG. As the reopening data only provides amounts outstanding, the outstanding amount on the previous date is subtracted from the outstanding amount on that given date to obtain the issuance amount on each relevant date. These calculated issuance amounts are converted on the transaction date using USD foreign exchange data from LSEG. To ensure consistency and comparability, the same method is used for all bonds, including those not subject to reopening.

Sovereign bonds issuance plotted in Figure 3.1 and Figure 3.2 equal to the net borrowing requirement during each year plus the redemptions of long-term instruments in the same year and the redemptions of short-term instruments issued in the previous year. Therefore, this indicator captures the issuance of all securities excluding those that were issued and redeemed in the same calendar year. In other words, gross issuance in the calendar year amount to how much the country issued in nominal terms to fully pay back maturing debt issued in previous years plus the net cash borrowing requirement through any issuance mechanism. This follows the same method to compute gross issuance in Chapter 1 and is referred as the standardised method.

Outstanding debts in local currency are converted to USD using end-of-year foreign exchange rates.

Exchange offers and certain bonds in the dataset have been manually excluded when they did not have a Bond ID identifier (ISIN, RIC or CUSIP) and when they could not be manually confirmed by comparing them with official government data.

LSEG provides information on the market of issuance of each bond. When this variable is available, the market of issuance is classified as “Domestic” if LSEG classifies it as “Domestic” or “Domestic (others)” and as “Foreign” in all other cases.

Credit ratings data

LSEG provides rating information from three leading rating agencies: Fitch, Moody’s, and S&P. For each country with rating information in the dataset, a value of 1 is assigned to the lowest credit quality rating (C or below) and 21 to the highest credit quality rating (AAA for Fitch and S&P,and Aaa for Moody’s). Non-investment grade categories include ratings up to BB+ for Fitch and S&P, and up to Ba1 for Moody’s.

The rating in question is then assigned to each relevant bond issued by that country (as at issuance or transaction date). If ratings are available from several agencies, their average is used. Final ratings are categorised as follows: those equal to or higher than 15 are classified as Investment Grade A (IG A); ratings falling between 12 and 14 are designated as Investment Grade BBB (IG BBB); ratings between 9 and 11 are categorised as Speculative Grade BB (SG BB); and ratings below 9 are classified as Single B high risk (Single B and below). Within the high-risk category, ratings equal to or lower than 3.5 indicate a default or very high risk of default.

When computing the number of upgrades and downgrades, ratings data are observed on a monthly basis, excluding those equal to 1. If a country has received several ratings from the same agency in one month, the latest one is used.

The weighted debt quality analysis uses rating information from three rating agencies (Fitch, Moody’s and S&P). The rating valid at the end of the year for a country is assigned to the totality of its outstanding debt stock. The share is then computed as a stock-weighted average across rating groups.

Primary market yields

The computation of primary market yields relies on LSEG data regarding the prices and yields of each issuance. These data are available only for a limited amount of bonds.

Yields and prices are assigned to our dataset based on the Bond ID and its date of issuance.

When multiple prices or yields are available for the same bond on the same date of issuance, the average value is considered.

When a yield or a price has the same Bond ID but not the same date of issuance, we consider the price or yield as having the closest issuance date for those Bond IDs falling within a five-day range before or after, beginning with one day later, followed by one day before, and so on.

When yields are not readily available, they are computed using the corresponding price and the R package called jrvFinance. Prices below zero or higher than 999 are excluded.

Yields that exceed 100 or fall below -5 are excluded. Yields that are more than 10 times the median annual yields for each issuer, considering the same instrument type and maturity category, are also excluded.

Notes

← 1.  Annual issuance includes all issuance in the year excluding those issued and redeemed in the same calendar year.

← 2.  LICs' ratios have significantly increased since 2015, and for LMICs, growth has been consistent since 2007. In contrast, HICs and UMICs saw notable increases only during the global financial crisis in 2008-09 and the COVID-19 pandemic in 2020, with these ratios remaining largely stable from 2009 until 2019. Despite these trends, there is significant potential for further development in LIC markets, with their ratios remaining much lower compared to other income groups.

← 3.  It is worth noting that the original sin refers not only to sovereign debt but to all debt across sectors, including corporate debt.

← 4.  The significant drop in the average ATM of bonds denominated in foreign currency in LICs can be attributed to the relatively low number of outstanding bonds in 2015 issued by these countries. More precisely, in 2015, Congo, Ethiopia, and Rwanda were the only LIC with outstanding foreign currency bonds, one each. These bonds had an original 22-year maturity for Congo and a 10-year maturity for Ethiopia and Rwanda. They had been first issued in 2007, 2014, and 2013, respectively. Mozambique issued one bond with a 7-years maturity in 2016 and one bond with a 12 years-maturity in 2019, and Rwanda followed with a new 10-years maturity bond in 2021.

← 5.  Conditions that amplify spillover effects of US monetary tightening cycles include US dollar appreciation, increases in global inflation expectations and high US term premiums. This cycle features the first two but not the third, as US term spreads are nearly their lowest in recent history.

← 6.  These figures include China and were sourced from the IMF World Economic Outlook.

← 7.  This estimate excludes EMDEs with no available yield-to-maturity at issuance data in LSEG, countries with relatively high inflation (i.e. Argentina, Lebanon, Türkiye, Venezuela and Zambia) and China.

← 8.  Equivalent to single B or below.

← 9.  A 10% yield in a USD-denominated sovereign bond is considered a rule-of-thumb threshold for debt distress. Yields above that threshold are considered too expensive for countries to service their debt in the long-term, potentially leading to difficulties in meeting repayment obligations and increasing the likelihood of default.

← 10.  High-risk countries corresponds to those with a credit rating in the range from single B to CCC.

← 11.  These countries are Angola (LMIC from SSA), Benin (LMIC from SSA), Cameroon (LMIC from SSA), Honduras (LMIC from LAC), Ivory Coast (LMIC from SSA), Kenya (LMIC from SSA), Nigeria (LMIC from SSA), Senegal (LMIC from SSA), Uzbekistan (LMIC from MECA), Türkiye (UMIC ex. China from Europe), Colombia (UMIC ex. China from LAC), Mongolia (UMIC ex. China from Asia ex. China), Costa Rica (UMIC ex. China from LAC), and Panama (HIC from LAC).

← 12.  This includes both cases in which there is no investor demand for a country's bonds or when the country opts not to issue due to prohibitive high borrowing costs.

← 13.  Survivorship bias occurs when analyses focus only on entities that have endured over time, ignoring those that failed. This can lead to overly optimistic conclusions, as the dataset excludes unsuccessful cases that might provide a more balanced perspective.

← 14.  These are: Angola, Benin, Cameroon, Congo, Ghana, Kenya, Mozambique, Nigeria, Rwanda, Senegal, and Zambia.

← 15.  These include two from LAC (Bolivia and Honduras), two from Asia (Sri Lanka and Papua New Guinea), and three from MECA (Egypt, Jordan, and Pakistan).

← 16.  Net issuance (i.e. the amount issued minus the amount redeemed within a specific period) is a proxy for the marginal exposure investors take. While this net figure does not fully capture the issuers' reliance on foreign investors —since some will buy their bonds directly in the local rather than international markets—it does offer a useful gauge of foreign demand. LICs' net borrowing from foreign markets in absolute terms is negligible, averaging just USD 100 million annually from 2015 to 2024. Thus, they were excluded from the analysis.

← 17.  The LICs and LMICs with negative net borrowing from foreign markets over 2022–24 are (ordered in ascending order by net borrowing): Egypt (MECA, high-risk), Ghana (SSA, high-risk), Sri Lanka (Asia ex. China, high-risk), Morocco (MECA, speculative BB grade), Vietnam (Asia ex. China, speculative BB grade), Bolivia (LAC, high-risk), Kenya (SSA, high-risk), Congo (SSA, high-risk), Rwanda (SSA, high-risk), Nigeria (SSA, high-risk).

← 18.  Corresponding to CCC- and below in S&P and Fitch; and to Caa3 and below in Moody’s.

← 19.  As of December 2024, the countries with credit ratings currently at default or with a high risk of default are Argentina, Belarus, Ethiopia, Ghana, Laos, Lebanon, Maldives, Niger, Ukraine and Zambia. Due to a rating upgrade of Argentina by Moody’s in January 2025, the number of these countries has decreased to nine as of February 2025.

← 20.  Values from the 1980s and 1990s are based on computations from the Bank of Canada and Bank of England Sovereign Default Database (Beers et al., 2024[18]). The values for the current tightening cycle consider the GDP of the countries with very high risk or in default as of 2024.

← 21.  Importantly, this observation is not driven by composition effects (i.e. by the inclusion of new countries in the pool of rated countries over the period of the analysis): It holds in absolute numbers as well as when only considering countries for which ratings have been available since 2000.

← 22.  These are: Albania (UMIC), Algeria (UMIC), Argentina (UMIC), Bangladesh (LMIC), Bosnia Herzegovina (UMIC), Brazil (UMIC), Burkina Faso (LIC), Egypt (LMIC), Eswatini (LMIC), Grenada (UMIC), Guinea Bissau (LIC), Kuwait (HIC), Laos (LMIC), Mali (LIC), Mauritius (UMIC), Moldova (UMIC), Montenegro (UMIC), Myanmar (LMIC), Namibia (UMIC), Niger (LIC), Pakistan (LMIC), Seychelles (HIC), Togo (LIC) and Yemen (LIC).

← 23.  In these countries, the central government's marketable debt is above 60% of the GDP as of 2023 (IMF, 2024[24]).