Examining the Influence of Economic Resilience on Sovereign Default Risk: An Emerging Market Perspective

Abstract

Sovereign default risk (SDR) is a critical concern for emerging markets like Bangladesh, given its potential impact on economic stability. This study examines how key macroeconomic indicators—remittances, fiscal deficits, GDP, foreign reserves, external debt, and the remittance-to-GDP ratio—affect Bangladesh's sovereign default risk from 2000 to 2024. The study fills a gap in existing literature by integrating the Balance of Payments Theory and Sovereign Risk Theory to create a comprehensive framework for analyzing SDR in Bangladesh. Using robust regression techniques, including Huber and Ridge regression, the research explores the relationships between these variables and Bangladesh's sovereign creditworthiness. The findings reveal that foreign reserves significantly reduce SDR, while remittances have a marginally positive effect, suggesting that over-reliance on remittances may increase sovereign risk. Fiscal deficit, GDP, and external debt, however, did not show significant effects, highlighting the complex nature of these relationships. The study emphasizes the importance of strengthening foreign reserves, diversifying economic sources, and managing fiscal discipline to reduce sovereign default risk. Policymakers can leverage these insights to enhance economic resilience and improve financial stability. This research contributes to the understanding of sovereign default risk by highlighting the role of reserves in mitigating risks and provides practical policy recommendations for Bangladesh's financial sustainability.