For example, I am familiar with the debt to GDP ratio and the debt servicing to revenue ratio.
I was wondering if they are other metrics out there and which is most preferred.
Another metric to measure a country 's exposure to debt is the so-called "Gross National Product" (GNP). The GNP is another economic indicator as the so-called "Gross Domestic Product (GDP). According to Investopedia, economists use GNP mainly to learn about the total income of a country's residents within a given period and how the residents use their income. GNP measures the total income accruing to the population over a specified amount of time. Unlike GDP, it does not take into account income accruing to non-residents within that country’s territory; like GDP, it is only a measure of productivity, and it is not intended to be used as a measure of the welfare or happiness of a country.
There is little difference between GDP and GNP for the US, but the two measures can differ significantly for some economies. For example, an economy that contained a high proportion of foreign-owned factories would have a higher GDP than GNP. The income of the factories would be included in GDP as it is produced within domestic borders. However, it would not be included in GNP since it accrues to non-residents. Comparing GDP and GNP is a useful way of comparing income produced in the country and income flowing to its residents.
Dear Jorge,
Thank you very much sir for your suggestions on the use of GNP.
I will look into the dataset of some developing countries to see if I can observe any variation that explains a country's debt exposure.
Hi,
Many governments use the public debt to fiscal balance ratio to measure fiscal space available for them.
Dear Yudhi,
Thanks for the suggestion. However, I now have a newer question.
Sir, I understand that fiscal balance can be positive or negative and can be measured in a different scale from public debt.
What size of the ratio is too much and how do we interpret negative ratios?
Negative ratio can be understood as the public debt is larger than the fiscal balance. Probably, the government budget runs a deficit. Alternatively, the budget runs a surplus, yet it is too small to cover the debt.
Public debt may not always be considered negative. Often, it is needed for keeping the momentum of development, particularly in developing countries. Accordingly, government of these countries may run deficit budget. Deficit budget is acceptable when the government has confidence there is current and future revenue to cover the debt. Unfortunately, many governments need to create new debts to cover old ones. When things get out of hand, assistance from international institution such as the IMF may be needed.
The limit where the ratio is too much may differ from country to country. We understand it as fiscal discipline. In some countries, it may be determined solely by the minister of finance or the head of the state. Others may implement stricker measure when the fiscal discipline is determined together by the government and the parliament.
As an illustration, in normal time Indonesia's fiscal discipline allows deficit up to 3%. However, due to the pandemic, the government and the parliament agreed to loosened the fiscal discipline. The government is now allowed to run budget deficit more than 3% for the next 3 year.
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