Does Gross or Net Debt Matter More for Emerging Market Spreads?

IMF Working Papers, December 22, 2016

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Investigates whether gross or net debt matters more for long-term sovereign bond spreads in emerging market economies (EMEs).
Motivated by the borrowing cost implications of public asset–liability management decisions (e.g. using assets to lower debt).

Sample: emerging market economies (EMEs) over the period 1998–2014.
Outcome studied: long-term sovereign bond spreads.
Empirical strategy compares effects of gross debt and public assets on spreads and examines robustness across alternative specifications and subgroups of EMEs.

Both gross debt and assets have a significant impact on long-term sovereign bond spreads in emerging markets.
Effects of gross debt and assets are roughly offsetting: coefficients of opposite sign and similar magnitude.
Net debt appears more appropriate than gross debt when evaluating the impact of indebtedness on spreads.
Quantitative result: an increase in net debt by 10 percentage points of GDP implies an increase in the spread by 100–120 basis points.
The effect of net debt on spreads is larger during periods of domestic distress.
The key results are quite robust to alternative specifications and subgroups of EMEs.

Asset–liability management that uses public assets to lower indebtedness can materially affect borrowing costs; net debt should be used to evaluate such effects.
Policymakers in EMEs should consider net debt metrics when assessing sovereign risk and cost of borrowing, especially during episodes of domestic distress.

IMF Working Paper No. 2016/246 (2016), Metodij Hadzi-Vaskov and Luca A Ricci.

Does Gross or Net Debt Matter More for Emerging Market Spreads?
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