By Sima Kammourieh and Jules Devie
Emerging markets and developing economies (EMDEs) continue to face significant economic and financial challenges. The World Bank’s 2024 International Debt Statistics highlight persistent negative external transfers impacting sovereign debt worldwide, driven mainly by high interest rates. Lower middle-income countries are most affected, but more integrated markets feel these pressures, too. Global uncertainty—like US trade policies and potential interest rate hikes—adds further complexity.
Meanwhile, EMDEs’ investment needs are rapidly growing, with climate-related funding gaps estimated in the trillions. Some high-income countries are tightening their aid budgets.
Amid tough financial conditions, limited public finance, and rising investment needs, attention is naturally turning to the evolution of private capital flows to these countries, in scale and composition.
As discussions around the cost of capital in developing countries (Africa especially) have come to the fore, one key question has gained renewed focus in recent times, namely: did the changes to the regulatory regime of commercial banks enacted after the Global Financial Crisis (GFC) play a role in changing the quantity and quality of private financial flows to EMDEs?
This paper proposes some key stylized facts to shed light on the matter, chief among which is the turnover from banks to bonds as the central external financing mechanism. Our analysis is grounded in a twenty-year data lookback (Appendix 1) and a review of relevant literature (Appendix 2). Its focus is on EMDEs, excluding China and other high-income countries that may be otherwise classified as EMDEs. It also offers an analysis on a regional basis, and income-group basis.