What drives borrowing costs for businesses in developing countries?

For a business in a developing country, the cost of borrowing is determined not just by their credit-worthiness, but by a range of factors beyond their control. Firms in low- and middle-income countries pay, on average, 2 percentage points more in real interest than comparable firms in a rich country. Compounded over years and across thousands of firms, represents an enormous cost to private sector development and job creation.

Yet despite this long-held knowledge of why capital markets matter, our understanding of how they price debt has remained surprisingly limited. Breaking down debt pricing into its component parts and assigning weight to each one has been difficult without the data to do so rigorously.

New research takes a step toward filling that knowledge gap. Drawing on more than 330,000 bond issuances on domestic and international markets by over 50,000 firms across 138 countries between 1990 and 2024, the research provides a comprehensive empirical picture of what precisely drives borrowing costs. 

1. Macroeconomic and capital account policy. Governments in developing countries sometimes limit foreign investor participation in their domestic bond markets to protect against sudden, destabilizing flows of money in and out of the country. This caution is understandable, but it comes at a price. With fewer lenders competing to hold their debt, businesses pay more.

The research finds that countries which have opened their markets to foreign investors see international corporate borrowing costs fall by 1.2 percentage points on average. In the 47 least financially open developing countries, this would have translated into an estimated $78 billion in savings on interest payments over the past decade. Opening a capital account will always involve tradeoffs and depends on country context, but the research makes clear what keeping markets closed costs businesses.

Government borrowing matters too. Corporate borrowing costs are priced relative to what governments pay on their bonds, meaning that when governments borrow at high rates, businesses end up paying more as well. The research finds that a 1 percentage point rise in government bond yields pushes up corporate borrowing costs by 76 basis points, showing how poorly managed public finances crowd out private borrowers and raise the cost of business investment.
 

2. Building a deep domestic investor base. Countries that shift to prefunded pension systems see more companies access bond markets for the first time. For established issuers, borrowing costs fall by approximately 150 basis points in the four years following pension reform. Over the past decade, pension reforms are estimated to have saved corporate borrowers more than $25 billion in interest payments for domestic issuances alone.

A thriving domestic capital market can partially shield domestic firms from swings in global financing conditions. When the U.S. Federal Reserve raises interest rates by 1 percentage point, corporate borrowing costs in developing countries rise by 47 basis points for companies borrowing in international markets, but by only 10 basis points for those borrowing domestically.
 

3. Corporate governance and transparency. Companies are not passive recipients of the interest rates their markets and governments set — their own behavior matters too. The research finds that unlisted firms in developing countries pay 84 basis points more in international borrowing costs than their publicly listed counterparts, largely because investors demand standardized and credible information before deciding to lend. More broadly, countries with stronger disclosure requirements, such as audited financial statements and transparent ownership structures, tend to have both lower corporate borrowing costs and more companies able to access bond markets.

We have long known that the cost of capital matters. We can now say with much more precision which factors influence pricing the most and what changes could reduce them. By opening capital accounts judiciously, reforming domestic pension systems, and managing sovereign debt responsibly, policymakers have the power to systematically lower the financial barriers to private sector growth. Every basis point reduced is capital freed up for hiring, innovation, and expansion. The tools to unlock this potential are known and governments and the private sector can put them to work.