Sovereign Debt Vulnerabilities in Developing Countries

Analyzing external debt vulnerabilities, the study divides developing nations into three groups by their market integration. It reveals rising private borrowing and soaring debt service ratios straining fiscal stability and development, calling for global financial reform to ease pressures and promote growth.
This study explores external debt vulnerabilities in developing countries based on their financial integration. It identifies three groups: Emerging-Market Economies (EMEs), upper-middle-income countries integrated into global capital markets since the 1990s; Frontier-Market Economies (FMEs), lower-income countries accessing markets post-2008 Global Financial Crisis; and Other Developing Economies (ODEs), with minimal market integration and reliance on public financing and Official Development Assistance. Using the sovereign debt life cycle framework, the study shows EMEs held 67% of their Public and Publicly Guaranteed (PPG) debt with private creditors in 2022. FMEs’ private-sector exposure doubled since 2010 to 32%, while ODEs remained low at 17%. This composition shaped outcomes: EMEs had net transfers of -$32 billion in 2022, FMEs -$2.2 billion, and ODEs $10.2 billion. FMEs face high borrowing costs and speculative-grade bonds. From 2010-2023, their external interest costs rose 15.5% annually—double the rate for EMEs and ODEs. FMEs’ debt service-to-revenue ratio jumped from 6.3% to 14.7%, versus 3% (EMEs) and 7.3% (ODEs). Their debt service-to-exports ratio tripled to 18.7%, worsening solvency risks. Access to the Global Financial Safety Net is uneven: EMEs benefit from regional mechanisms and swap lines; FMEs and ODEs rely mostly on IMF financing. From 2017-2023, two-thirds of developing countries saw deteriorating financial sustainability, as debt payments constrained development goals. The report calls for global financial reforms to lower borrowing costs and improve debt sustainability—essential to achieving the 2030 Agenda and Paris Agreement.

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