Frontier markets: charting a more sustainable course as the global storm abates

After the recent market rally, Thys Louw reflects on the importance of reforms and the trend towards ‘green’ funding in frontier markets.

7 Aug 2023

3 minutes

Thys Louw

Over recent weeks frontier debt markets have enjoyed a strong rally after being caught in the eye of the storm that raged through fixed income markets in 2022. From lingering in the depths of the EM hard currency market return tables for most of last year, a number of these markets have soared to pole position.

EM hard currency market (JP Morgan EMBI) returns, Q2 2023 – all top 10 markets are frontiers

1 Pakistan 42.0%
2 Ukraine 35.4%
3 Zambia 28.1%
4 El Salvador 27.2%
5 Sri Lanka 25.5%
6 Bolivia 21.9%
7 Ghana 19.0%
8 Argentina 16.8%
9 Nigeria 12.5%
10 Mozambique 7.8%

Source: Bloomberg, JP Morgan, as at 30 June 2023.

The more supportive external environment is undoubtedly helping by removing some key headwinds. But within the frontier market universe we have seen a succession of positive news around IMF and other multilateral support, and a significant pick-up in reform momentum. Crucially for debt investors, these developments can provide useful signposts around what it means to chart a sustainable economic and financial course. 

Supportive tailwinds: recent positive developments in the frontier market universe

The list is long but here are a few highlights:

  • Nigeria: investor sentiment has been given a major boost since President Tinubu took the helm in May. As we discussed here, reforms have been fast-tracked, with the removal of the costly fuel subsidy and liberalisation of the exchange rate both significant steps.
  • Tunisia: IMF deal prospects improved significantly after the US and EU showed willingness to support President Saied’s reform plans. EU funding has also surpassed initial expectations, and the recently signed migration deal requires socio-economic and other reforms.
  • Paraguay: the election of former finance minister and IMF economist Santiago Peña as president in May reinforces fiscal discipline and puts Paraguay solidly on the path to attaining investment-grade status in the medium term.
  • Kenya: significant fiscal and monetary tightening, together with increased multilateral support, is reducing Kenya’s external and domestic imbalances.
  • Pakistan: authorities recently surprised the market by agreeing to a US$3 billion short-term financing deal (Stand-By Arrangement) with the IMF after revealing a programme of planned tax rises in its budget.

Keys to plain sailing

In the short-term, various support packages from the IMF, World Bank and other multilaterals remove immediate funding concerns, and over the medium term, conditions in the external debt market could eventually return to ‘normal’. However, over the long-run, wide-ranging reforms are vital for putting frontier-market economies on a sustainable course. The ability of economies to do more with less will be key here, and this is becoming especially urgent as the higher rates environment is making investors more demanding – creating higher hurdles to accessing external debt markets. But even for sovereign issuers that reform and put their economies on a sustainable path, yields in the hard currency debt market remain prohibitively high – even after the recent rally – so a broader approach to funding is essential. Here, multilateral finance and/or guarantees that link to sustainability will be increasingly important. Below we share some examples of frontier markets that are leading the way.

  • Under a recent deal with the EU, Senegal will receive EUR2.5 billion to help fund its energy transition. The agreement (under the Just Energy Transition Partnership), together with recent funding announced by the IMF, has significantly improved the country’s external funding outlook while also putting it on a sustainable energy path.
  • Rwanda has secured energy transition funding under the Resilience and Sustainability Facility arrangement with the IMF. Furthermore, International Development Association (IDAS) funding from the World Bank will support a sustainability-linked bond to be issued in local currency.
  • Ecuador, Barbados, Seychelles, Gabon and Belize have all carried out various forms of ‘debt-for-nature’ swaps, often backed by The Nature Conservancy.


Although conditions in the external debt market could eventually return to ‘normal’ for some frontier markets, reforms remain essential for charting a sustainable course and attracting investment. Even then, securing alternative sources of finance – especially sustainability-linked finance – will be vital.

While the rewards for reforming countries are clear, we expect countries that do not conduct the necessary economic reforms to face an increasingly precarious outlook. We also think the future of funding in frontier markets will look much greener.

Authored by

Thys Louw

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