Overcoming original sin: insights from a new dataset

Paper revised in September 2023
Dataset updated in December 2023: sample period extended to Q4 2022

The emerging market sovereign bonds dataset used in this paper is available here. The compilation guide provides meta data by country and describes the main steps involved in constructing the holdings series.

Summary

Focus 

Emerging market economies (EMEs) have faced crises in the 1990s, in part due to their borrowing in foreign currency. EMEs would be less exposed if they would borrow abroad in their own currency instead. This paper examines whether EME governments have made progress on this front, and whether it helped them secure more stable financing from abroad.

Contribution 

We define the key ratios and trends discussed in this literature and provide a new dataset to measure them. Our dataset covers government bonds for 25 major EMEs, with quarterly data from 2005 to 2021. It combines BIS statistics on government bonds with series collected from national sources that show the amount held by foreign investors. Both parts are split into local currency and foreign currency bonds. Looking at long-term bonds is consistent with the focus on non-bank financial intermediaries and on market and duration risk. The dataset is made available online along with dashboards for visualisation.

Findings

Major EME governments have gradually reduced their reliance on foreign currency debt by borrowing more in their own currencies overall. They have also encouraged foreign investment in their domestic market, especially in local currency bonds. As a result, EMEs now finance more of their external debt in their own currency than was the case in the early 2000s. At the same time, depreciations in EME currencies often reduce returns to foreign investors, who sell local currency bonds in periods of stress. Even when EMEs rely less on foreign currency borrowing, they continue to face volatile capital flows.

Abstract

This paper introduces a new dataset on emerging market sovereign bonds, distinguishing between the currency of denomination and the residence of investors. Our dataset is on long-term government bonds and provides a more complete coverage of bonds issued in domestic markets. We document several salient trends. While a preponderance of foreign currency bonds is associated with greater holdings by foreign investors, the correlation is weak at best. Over time, emerging market governments have enhanced their ability to borrow abroad in their own currency, reducing their reliance on foreign currency debt. In this sense, EME sovereigns have made progress toward overcoming original sin. Nevertheless, the greater role of market and duration risk and the activity of foreign non-bank financial intermediaries (NBFIs) mean that emerging markets remain subject to fluctuations in global financial conditions.

JEL classification: F34, G15, H63

Keywords: emerging market economies, sovereign bonds, international lending, international financial markets, foreign investors, original sin