Governing Market Access: How Index Providers Gatekeep Local Currency Sovereign Debt

A government’s ability to borrow in its own currency is thought to increase control over debt repayments and enhance national policy autonomy. Yet access to local currency bond markets remains relatively limited for many developing countries. In particular, access to a vast pool of passive capital in the market is heavily influenced by index providers that actively curate local currency bond indexes. Given the influence of index inclusion on capital flows, we probe the conditions under which the largest index provider, JP Morgan, includes and excludes developing country sovereign bonds from its major local currency sovereign bond index. We find that borrower partisanship, policy choices, and political institutions are significantly associated with JP Morgan’s index inclusion and exclusion decisions. This identifies political factors that affect sovereign bond market access against the backdrop of a recent wave of research finding mixed or conditional evidence about investor discipline of political factors in sovereign debt. The findings also highlight the fact that the political economy of sovereign access to bond markets varies across markets. Lastly, the study illustrates the governance effects of private actors in sovereign debt, signalling the importance of further research into how firms like index providers assess politics and affect financial flows.