Over the past decade, a large number oflow- and lower-middle income ‘frontier economies’ have begunto access international private capital markets to meetfiscal financing needs. In this paper we seek to identifydrivers of this trend, identify associated risks, andpresent policy implications for frontier-marketpolicy-makers. Through simple analysis of thecharacteristics of recent frontier market issuers, we showthat smaller, poorer, and less well-governed economies arenow accessing global credit markets. Through cross-countryregression analysis, however, we demonstrate that thecapacity of these countries to issue debt (and the cost ofthis debt) continues to be influenced by their macroeconomicperformance and quality of governance. Drawing on evidencefrom Ghana and Zambia, we illustrate potential risks arisingfrom recent expansions of access to global debt markets,where rapid debt accumulation of foreign-denominated debt inthe context of lessened market discipline and followingrecent debt relief is now posing pronounced debtsustainability and refinancing risks. We conclude thatincreased access to international debt markets presents bothopportunities and risks to frontier issuers. The new cohortof frontier issuing economies should: i) take carefulaccount of debt risks and debt sustainability considerationswhen developing fiscal policy and debt strategies; ii) workto reduce the costs of ongoing external borrowing throughadopting sound economic policies and protecting creditratings; and iii) develop domestic debt markets as apotential alternative source of fiscal financing throughwhich to reduce reliance on foreign-denominated Eurobonddebt with its associated refinancing and currency risks.
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