Closing the gap in borrowing costs for emerging market firms

Firms in low- and middle-income countries persistently pay more to borrow than firms in high-income economies. Drawing on a new World Bank Group study of more than 330,000 bond issues, this column shows how stronger sovereign benchmarks, deeper domestic institutional investor bases, and carefully sequenced financial liberalisation can broaden market access and lower borrowing costs for firms in these countries.

How can emerging markets sustain private investment when firms face costly financing and repeated global shocks? This concern runs through a growing policy debate. Abbas et al. (2025) show how high interest rates can expose corporate vulnerabilities. Kalemli-Ozcan and Unsal (2026) examine how policy credibility and foreign-currency exposures shape the transmission of these shocks to emerging markets. Wong et al. (2026) highlight the role of deeper domestic bond markets in helping economies absorb such shocks.

Against this backdrop, a new World Bank Group study (Mauro and Meh 2026) asks a practical question: what can policymakers do to reduce the price at which emerging market firms raise debt? Drawing on more than 330,000 corporate bond issues in 138 countries, the study documents a persistent and economically significant divide. Firms in low- and middle-income countries (LMICs) pay 2 percentage points more, in real terms, than firms in high-income countries (HICs). This is not merely a feature of the latest tightening cycle: the gap has persisted over decades and is especially pronounced in low- and lower-middle-income countries. 

More generally, the study estimates the impact of global trends, country conditions, firm characteristics, and bond features. The analysis encompasses essentially all bond issuances globally, in domestic and international markets, between 1990 and 2024, covering over 50,000 firms worldwide. It is thus one of the most comprehensive assessments of corporate borrowing costs to date and includes local-currency borrowing, which now accounts for most LMIC corporate bonds.

Local-currency markets are now central to the policy challenge

The composition of LMIC corporate borrowing has changed markedly. Local-currency bonds accounted for less than 30% of LMIC corporate bond issuances in the 1990s. By 2024, their share had risen to almost 90%, narrowly exceeding the share in high-income countries. These markets matter particularly for smaller, younger, and first-time issuers, most of which do not issue internationally (Meh and Schmukler 2025). Yet much of the literature on emerging market corporate debt focuses on dollar bonds, leaving the dominant source of LMIC corporate bond finance comparatively understudied.

But the shift to local currency has not, by itself, closed the pricing gap. Between 2015 and 2024, the median real-yield gap between LMIC and HIC firms was 2.5 percentage points for local-currency bonds, compared with 1.5 percentage points for dollar-denominated bonds. Issuing in local currency removes a direct currency mismatch for the borrower; it does not guarantee cheap funding. Beyond firm-level characteristics, the cost still depends on macroeconomic credibility, sovereign benchmarks, market liquidity, and the depth of the domestic investor base.

The sovereign anchors corporate pricing

Sovereign conditions provide the clearest bridge between the macroeconomic environment and corporate pricing. In LMICs, a one percentage point increase in sovereign yields is associated with a 76 basis point increase in domestic corporate yields and a 46 basis point increase in international corporate yields.

Part of this link reflects shared country risk. But sovereign markets also shape pricing more directly by providing the yield curve against which corporate bonds are valued. Predictable issuance calendars, regular reopenings, liquid reference bonds at key maturities, transparent debt-management strategies, and functioning secondary markets can improve price discovery and reduce liquidity and term premia. Inclusion in a major global bond index can reinforce this process by attracting benchmark-driven demand and increasing the visibility and liquidity of sovereign debt.

The study examines sovereign entry into JPMorgan’s Emerging Markets Bond Index across 60 LMICs. Corporate issuance does not fall after inclusion, offering no evidence that stronger foreign demand for sovereign bonds crowds firms out of capital markets. The pricing effect is concentrated among established international issuers, whose real yields decline by 64 basis points. This is consistent with a better-priced and more liquid sovereign benchmark feeding through to corporate debt.

Domestic savings lower domestic borrowing costs

One route to cheaper domestic financing is to deepen the pool of long-term local savings. Figure 1 examines 30 LMICs that introduced mandatory or quasi-mandatory individually funded pension programs. Panel A shows that the number of bond-issuing firms rises after reform. Panel B shows where the pricing effect is concentrated: real yields fall by about 150 basis points for firms that issue domestically both before and after the reform, with no comparable decline in international markets.

Figure 1 Pension reforms broaden market access and lower domestic yields for established issuers

Source: Mauro and Meh (2026), Figure 3.2.
Note: Event-study estimates for 30 LMIC pension reforms; bars show the p5-p95 bootstrap interval. Panel B compares all issuers with firms issuing both before and after reform.

That distinction matters. Pension reform can bring less-established firms into the market. Their entry may leave the average yield across all issuers little changed, even as comparable incumbent firms obtain cheaper funding. Market development can therefore operate on two margins at once: more firms gain access, and established firms pay less.

The design of portfolio rules matters as much as the accumulation of savings. The estimated decline in domestic yields is about 60 basis points larger where pension funds face fewer restrictions on investing in non-government securities. Mobilising long-term savings will have less impact on corporate markets if regulation channels most of those savings into government debt. The lesson is not that pension systems should be designed around corporate finance, but that a large and diversified institutional investor base can support local-currency bond markets.

Greater access to global savings lowers international borrowing costs

Financial liberalisation reaches a different segment of the market. Figure 2 examines 24 major liberalisation episodes in LMICs between 2000 and 2021. The number of issuing firms rises progressively after liberalization. Among firms active internationally both before and after the policy change, real yields fall by about 120 basis points. The estimated decline in domestic yields is smaller (and statistically insignificant).

Figure 2 Liberalisation expands access to global savings and lowers international yields for established issuers

Source: Mauro and Meh (2026), Figure 3.3.
Note: Event-study estimates for 24 major capital-account liberalization episodes; bars show the p5-p95 bootstrap interval. Panel B compares all issuers with firms issuing both before and after liberalization.

Here too, composition matters. Liberalisation brings new and potentially riskier borrowers into the market, so the average yield across all issuers may move little even as comparable incumbent firms borrow more cheaply. A muted average response can therefore coexist with both lower costs for established firms and broader market access.

Domestic and international finance are complements, not substitutes. International borrowing is far more sensitive to global conditions: a one-percentage-point increase in the US federal funds rate is associated with a 47 basis point increase in LMIC international corporate yields, compared with 10 basis points domestically. Foreign participation broadens the pool of capital, while a deep domestic investor base provides a more stable source of local-currency funding. This complementarity also lies at the centre of the wider policy debate on capital-flow volatility and domestic financial depth (Schneider et al. 2020).

Wider reforms are needed

The persistence of the LMIC–HIC yield gap cautions against looking for a single quick fix. The evidence instead points to a more comprehensive policy agenda. The hard but crucial task of making fiscal and monetary frameworks more credible can not only lower the sovereign risk premium, but also make borrowing cheaper for private firms. A diversified domestic institutional investor base can support local-currency financing, especially for firms unable to issue abroad. Financial integration can give established firms access to deeper pools of global savings. Firm fundamentals, market infrastructure and credible disclosure also matter. These reforms should not be pursued in isolation but instead designed to reinforce one another, helping bond markets become more reliable and cheaper sources of finance for firms in developing economies.

Source : VOXeu