EM sovereign debt risks are highest in this country

In partnership with

On Monday I published the latest edition of the Sovereign Stress Tracker, where I examine sovereign debt strains in 43 market-access emerging markets. It is available now to Tellimer subscribers here: log in to your account to download it from the Sovereign Vibe channel. For those of you who aren’t on that platform, my premium reports will soon be available for direct purchase.

In the Tracker’s new edition, I’ve added a table to show how sovereign stress probability rankings per the model compare to each country’s sovereign rating from Moody’s, S&P, and Fitch. As expected, the model’s predictions of sovereign stress likelihood 1-2 years ahead maps well with the credit ratings, though cases of misalignment may highlight potential opportunities.

It should come as no surprise that the prospects of sovereign debt stress in the emerging markets universe have ticked upwards so far in 2025.

The Sovereign Stress Tracker is based directly on an IMF model with several macro-fiscal variables as independent variables.

One of them is global: the VIX, i.e. Wall Street’s fear gauge.

It is up by a whopping 40% y-o-y, helping explain higher likelihoods of sovereign stress across the board, all else equal.

Tracking sovereign stress

Suriname has once again claimed the forward-looking top spot as the most at-risk country in the sample.

In 2025, it has the largest current account deficit (at a scarcely-believable -34% / GDP) and public external debt burden (49% / GDP) of the 43 countries, and the second-highest increase in its real exchange rate over three years (+22%).

Suriname also fares poorly on institutional quality, which measures government effectiveness and regulatory quality, and is also penalized for its pandemic-era default.

Compared to its peers, the country scores well for its high level of international reserves (30% / GDP), its slight decrease in general government debt over the past year, and its negative credit gap.

Suriname’s sovereign risk drivers

As per the chart below, measuring the relative impact of each variable on Suriname’s stress probability shows that the biggest driver of all is the high public external debt burden.

The second-biggest driver is the international reserves level, though this effect is of course positive, i.e. it mitigates sovereign risk.

But poor institutional quality and the yawning current account deficit also have a strong negative impact on Suriname’s score, helping push it to the top rank as most-at-risk.

It’s important to note that contextual factors like the prospects for oil exploration, the government’s commitment to reform, and its credibility in the eyes of the IMF are important qualitative factors to consider beyond the fundamentals in the Tracker.

Cross-currents

Higher debt strains in these middle-income countries have coincided with an incipient tailwind for the EM asset class, with a weaker dollar and a secular investor rotation away from U.S. assets poised to bolster EM inflows.

Yet the likely end to U.S. exceptionalism - and the prospect of multiples compression in U.S. equities and higher Treasury yields - have confronted EM with cross-currents.

These have come in the form of risk-off sentiment that dominated much of April and which can still hurt all of EM.

Even more striking is the blow suffered by Taiwanese insurers and exporters, whose U.S. assets took a beating this week in a generational single-day strengthening of TWD against the greenback.

A further complication is the fact that, while a depreciating dollar makes it easier for hard currency issuers to service their debt, it also increases sovereign risk by eroding competitiveness via ceteris paribus real exchange rate appreciation.

Disclaimer: The content provided in this newsletter is for informational purposes only and should not be construed as financial, investment, or other professional advice. While I strive to ensure accuracy, I make no guarantees regarding the completeness or reliability of the information presented. Readers are encouraged to conduct their own research and consult with qualified financial professionals before making any investment decisions. The author and publisher are not responsible for any actions taken based on the information provided.