IMF Working Paper: Do Financial Markets Value Quality of Fiscal Governance? by Kady Keita, Gene Leon, and Frederico Lima is using PEFA Data to identify which public financial management practices matter most for improving market access, targeting or sequencing of PFM reforms.

In this paper is examined the link between the quality of fiscal governance and access to market-based external finance. Stronger fiscal governance is associated with improvements in several indicators of market access, including a higher likelihood of issuing sovereign bonds and having a sovereign credit rating, receiving stronger ratings, and obtaining lower spreads. Using the more granular information on quality of fiscal governance from Public Expenditure and Financial Accountability (PEFA) assessments for 89 emerging and developing economies, the find was that similar indicators of market access are correlated with sound public financial management practices, especially those that improve budget transparency and reporting, debt management, and fiscal strategy.

PEFA Scores and Market Access

In addition, these large potential gains justify a clear role for multilateral institutions, including the IMF, to foster fiscal governance improvements through capacity building, technical assistance and, where relevant, program design. There are several interesting avenues for future research. First, it would be useful to examine the impact of fiscal governance on other sources of financing that have also grown more relevant 19 in recent years, such as external loans and foreign participation in domestic bond markets. Second, future work could examine if strong fiscal governance helps retain market access and achieve better macroeconomic outcomes during crisis periods.