Does the composition of government expenditures matter for sovereign bond spreads' evolution in developing countries?

Jean-Louis Combes (1) , Alexandru Minea (1) , Pegdéwendé Nestor Sawadogo (1)

1 CERDI - Centre d'Études et de Recherches sur le Développement International

This paper evaluates the effects of public expenditures on sovereign bond spreads in emerging market countries. Specifically, the paper explores empirically how country risk, as proxied by sovereign bond spreads, is influenced by the different types of government expenditures (namely current spending, public investments, spending on education, health, social protection, economic affairs and defense) and country-specific fundamentals. Using panel data from emerging market countries, we find that governments can improve their borrowing conditions in international financial markets by heightening public investment and managing their current spending. In accordance with the empirical literature on the determinants of spreads, we find that country-specific fundamentals are also important determinants of spreads. Further, we find evidence that financial markets’ reaction to public expenditures depends on government effectiveness.

Mots clés: Emerging market; Government effectiveness; Government expenditures; Sovereign bond spreads

Domaines: Economies et finances

Jean-Louis Combes, Alexandru Minea, Pegdéwendé Nestor Sawadogo. Does the composition of government expenditures matter for sovereign bond spreads' evolution in developing countries?. 2019. ⟨halshs-02019063⟩