International Monetary Fund (IMF)
The report’s chapter three, released on Monday, noted that the sharp rise in debt levels, coupled with persistent global financial shocks, is reshaping the landscape of sovereign borrowing and exposing new vulnerabilities.
The report found that while some major emerging markets have built resilience by issuing long-term debt in local currency and cultivating a diverse base of domestic investors, many others remain heavily reliant on short-term borrowing and foreign currency debt. This divergence in debt structures has led to uneven stability across EMDEs, with countries lacking strong policy frameworks facing elevated risks of capital flight, debt distress, and financial instability.
“Emerging markets with deeper local currency bond markets and stronger macroeconomic fundamentals have weathered global shocks with greater stability,” the IMF noted. These countries have benefited from reduced currency mismatch and lower rollover risks, while others, particularly frontier markets, continue to grapple with shallow financial systems and limited absorption capacity.
The report highlighted a growing sovereign-bank nexus in some economies, where domestic banks absorb large volumes of government debt. While this can provide short-term financing relief, it also raises systemic risks in the event of debt restructuring, potentially triggering feedback loops that threaten financial stability.
The report’s key findings include that local currency issuance has increased, especially in major EMs, helping insulate public finances from external volatility; nonresident investor appetite has waned, with foreign holdings of local debt stagnating and portfolio flows slowing amid a strong dollar and rising US yields.
They also involve debt maturities that have lengthened in many EMDEs, but some countries still face high real interest costs that exceed projected growth, posing fiscal challenges, while overreliance on domestic banks for sovereign debt absorption can crowd out private credit and amplify risks during periods of stress.
The IMF called for targeted reforms to deepen local currency bond markets, including improving debt issuance transparency, strengthening primary dealer systems, and expanding the investor base. It also urged EMDEs to bolster fiscal and monetary credibility to attract stable, long-term funding and reduce exposure to sudden stops.
As global financing conditions tighten, the report warns that countries with weak frameworks and limited market depth may struggle to manage rising debt burdens, underscoring the need for proactive policy measures to safeguard financial stability.
Egypt targets external debt cuts of $1-2 billion annually under its new economic model the Egypt’s Narrative for Economic Development. Egypt eyes external debt level of below 70 percent by FY2028/2029 under its current $8 billion loan deal, which will be concluded in November 2026.
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