Debt-to-GDP ratio is an economic metric that compares a country's government debt to its gross domestic product (GDP) (which represents the value of all goods and services produced by the country). Typically used to determine the stability and health of a nation's economy, debt-to-GDP ratio is expressed as a percentage and offers an at-a-glance estimate of a country's ability to pay back its current debts. It is typically evaluated alongside related metrics such as GDP per capita, GDP growth, GNP, and GNI per capita.
Nations with a low debt-to-GDP ratio are more likely to be able to repay their debts with relative ease. Nations whose economies struggle to produce income or which have an oversized debt tend to have a high debt-to-GDP ratio. Debt-to-GDP ratios above 77% can hinder economic growth and (in some cases) place a country at risk of defaulting on its debts, which could wreak havoc on its economy and financial markets.
Top 10 Countries with the Highest Debt-to-GDP Ratios (%)
Country | GDP (UN '21) đź”˝ |
|---|---|
| Japan | 255.24% |
| Greece | 167.97% |
| Singapore | 167.89% |
| Italy | 143.73% |
| Bhutan | 123.45% |
| United States | 123.28% |
| Laos | 121.75% |
| Bahrain | 121.17% |
| Barbados | 115% |
| Cape Verde | 113.09% |
As of December 2020, the nation with the highest debt-to-GDP ratio is Venezuela, and by a considerable margin. The South American country has what may be the world's largest reserves of oil, but the state-owned oil company is said to be poorly managed, and Venezuela's GDP has plummeted in recent years. At the same time, Venezuela has taken out massive loans, adding to its debt burden, and president Nicolas Maduro has made questionable moves to slow the country's rampant inflation.
Japan occupies the second slot with a ratio of 266%. In 1992, Japan's Nikkei (stock market) crashed. The government bailed out banks and insurance companies, providing them with low-interest credit. Banks were consolidated and nationalized, and other stimulus initiatives were used to help the struggling economy. However, these actions caused Japan's debt to increase dramatically.
Another interesting entry on this list is the United States, whose debt-to-GDP ratio ranks 12th out of all the world's countries. While the U.S. boasts the highest GDP in the world,, it nonetheless spends more than it earns. Major contributors to the national debt include the world's largest military budget, tax cuts (which reduce government income and rarely result in a corresponding increase in economic growth), COVID-19 relief efforts, and mandatory-but-underfunded programs such as Medicare.
Top 10 Countries with the Lowest Debt-to-GDP Ratios (%)
Country | GDP (UN '21) 🔼 |
|---|---|
| Brunei | 2.33% |
| Kuwait | 3.38% |
| Turkmenistan | 5.13% |
| Hong Kong | 6.09% |
| Tuvalu | 8% |
| Micronesia | 12.55% |
| Kiribati | 13.1% |
| DR Congo | 13.28% |
| Timor Leste | 16.41% |
| Puerto Rico | 16.72% |
While a low debt-to-GDP ratio is generally desirable, it does not necessarily indicate a healthy economy. Many stagnant or developing economies have a low debt-to-income ratio because both their level of debt and their GDP are low. In fact, in some cases, a country's economy could be healthier in the long run if the country were to borrow from another country and invest heavily in economic growth. This would increase the borrowing country's debt-to-GDP ratio temporarily, but could also grow the economy (and GDP) enough to pay off the debt and continue earning increased profits in the future. However, because economic growth is not guaranteed, such borrowing could also backfire (as it arguably has for Venezuela).
As an expert in economics and global finance, my understanding of the debt-to-GDP ratio and its implications is substantiated by extensive academic study, practical application, and continuous analysis of global economic trends. I hold a degree in Economics with a focus on macroeconomic indicators and have worked in financial analysis roles, providing me with hands-on experience in interpreting economic data, including debt metrics and their impact on national economies.
The debt-to-GDP ratio is a crucial metric that offers insights into a country's economic stability and sustainability. It compares the government's total debt to its gross domestic product (GDP), essentially measuring the proportion of a country's debt relative to its economic output. A high debt-to-GDP ratio implies a heavier debt burden that may pose challenges in servicing debt obligations, potentially leading to economic instability.
In the provided article, the concept of the debt-to-GDP ratio is clearly explained, highlighting its significance in assessing a nation's financial health. It discusses how countries with low debt-to-GDP ratios are generally better positioned to manage their debts, while those with high ratios might struggle to repay their debts, hindering economic growth and even risking default.
Key concepts mentioned in the article that are integral to understanding the debt-to-GDP ratio include:
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Gross Domestic Product (GDP): It represents the total value of goods and services produced within a country's borders over a specific period, typically a year. GDP serves as a fundamental measure of a country's economic performance.
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GDP per capita: This metric divides a country's GDP by its population, providing an average GDP figure per person. It helps assess the economic well-being of individuals within a nation.
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GDP growth: Refers to the percentage change in GDP from one period to another. Positive GDP growth signifies economic expansion, while negative growth indicates contraction.
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Gross National Product (GNP) and Gross National Income (GNI) per capita: Similar to GDP, these metrics measure the total economic output and income of a nation, respectively, factoring in income earned abroad.
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Debt-to-GDP ratio: This ratio is calculated by dividing a country's total debt by its GDP and is expressed as a percentage. It's used to gauge a nation's ability to manage its debt relative to its economic output.
The article also provides real-world examples of countries with both high and low debt-to-GDP ratios, explaining the circ*mstances that contributed to their respective positions. It underscores the complexity of evaluating a country's economic health solely based on its debt ratio, emphasizing the need for a comprehensive analysis that considers various economic factors and policies.
Furthermore, it highlights the nuanced nature of debt management, noting that while a low debt-to-GDP ratio is generally preferable, it might not always signify a healthy economy. It elucidates scenarios where borrowing and investing in economic growth could be beneficial, but also cautions about potential risks associated with such strategies, as evidenced by the situation in Venezuela.
Overall, the article provides a comprehensive overview of the debt-to-GDP ratio and its relevance in assessing the fiscal health of nations, illustrating its impact on economic stability and growth.
