# **VII. Conclusion and Policy Implications**

Using the universe of all externally issued bonds during the 2000-14 period, this paper shows the post-crisis period has seen an unprecedented surge in external bond issuance and stocks across emerging and developing economies (EMDEs). Bond yields (and spreads) at the time of issuance have fallen to record lows, in part as a result of loose global funding conditions produced by extraordinary monetary policies (EMPs) in developed economies.

In particular, the volume of bonds issued in the six post-crisis years tripled to $1.5 trillion compared to the six years before the crisis, overwhelmingly denominated in foreign currencies and driven by corporate issuance. This surge is not driven by a single region or country, but reflects a broad-based trend, since the 2009-14 cumulative external issuance to GDP ratio is 6.7% for the median EMDE, up from 4.3% in the pre-crisis period. The trend is also present at the countryindustry level across EMDEs even after we correct for their own historical issuance average. Under such benign conditions, many EMDEs issued externally for the first time, including Armenia, Angola, Ghana, Laos, and Tanzania.

Contrasting the pre- and post-crisis periods, we find that countries of external issuers currently are on average richer, have deeper financial systems, and lower external debt. The fraction of issuance that is rated investment grade has also improved. However, these countries currently also have much slower GDP growth and larger current account deficits which can weaken debt servicing capacity and raise external vulnerabilities.

This paper also finds that global factors have a powerful impact on primary activity in international bond market by corporates and sovereigns EMDEs. Controlling for United States interest rates, a battery of country pull factors, and year fixed effects to account for the overall impacts of major global conditions and time trends, we find that a decrease in i) expected U.S. equity market (or interest rate) volatility, ii) U.S. corporate credit spreads, iii) U.S. interbank funding costs and iv) an increase in the Federal Reserve’s balance sheet:

1. Raise the odds that a country-industry’s monthly external issuance volume is above _its own_ historical average. For example, a doubling (halving) of the Fed’s balance sheet increases these odds by about 75% (-43%);

2. Lower the yield-to-maturity spread of external bonds at the time of issuance, _even_ after accounting for individual bond characteristics (e.g. volume, currency, riskiness, industry, type of issuer). For example, a doubling (halving) of the Fed’s balance sheet lowers (increases) a bond’s spread by 63 basis points; and 3. Increase the maturity of non-perpetual external EMDE bonds at the time of issuance, again after accounting for individual bond characteristics. For example, a doubling (halving) of the Fed’s balance sheet is associated with a maturity lengthening (shortening) of 48 weeks.

We also find empirical support that the risk-taking channel of exchange rate appreciation (e.g. Bruno and Shin (2015b)) also operates for external bond issuance: real depreciation of the U.S. Dollar is associated with a higher propensity for country-industries to issue externally above their historical average volume. More specifically, when the local currency appreciates, local borrowers’ balance sheets strengthen. This in turn increases their external borrowing capacity which triggers higher cross-border flows by international investors who are willing to take on more risk. This process can be self-sustaining, at least for a while.

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