Crude Credit: The Political Economy of Global Finance and Natural Resource Wealth

Do global financial markets intensify the resource curse by providing easy credit? Faced with limited time and certainty, international investors tend to use heuristic devices to evaluate sovereign credit risk. One of these heuristics is natural resource wealth. Using data on ten Latin American oil-producing countries from 1998 to 2019, we show that sovereign risk premiums tend to decline during commodity upturns, as increased global liquidity also raises market expectations of debt repayment. Surprisingly, sovereign governments respond to this cheaper credit by borrowing less, not more. Why? Political economy theory expects politicians to use credit to engineer politically-timed booms, but we challenge and contextualize this view by incorporating fiscal constraints. After internalizing historical lessons of debt management from past commodity booms, politicians are more likely to issue new debt when their governments lack fiscal resources, and have considerable debt management experience. Otherwise, policymakers approach private lenders cautiously; they use resource rents and revenues to meet existing fiscal needs, and issue bonds less frequently and in smaller amounts.

Oil and gas fields discovered in Latin America, 1996–2018