2
$\begingroup$

After Malaysia's national debt was [reassessed][1], its totaled $250bn along with other government liabilities.

Now, I'm having trouble understanding the direct relevance of the ratio of goverment debt to gross domestic product, in Malaysia's case.

Namely, in the article it is stated that its 80 percent of Malaysia's gross domestic product. Why is this statistic important? That is, why should I care about the total government liabilities of Malaysia's being 80% of its gross domestic product.

In the case of Turkey, [it][2] is mentioned that companies based in Turkey are suffering under the weight of the foreign debt amounting to some $300bn. The comparison to the countries GDP is then made again; "\$300bn is more than a third of GDP".

Again, what gives a measure on the relevance of that the foreign debt is more than a third of GDP?

How does this measure differ from country to country?

[1]: Malaysia leader on a mission (Hannah Beech and Richard C. Paddock, Sa-Su 16th of June 2018)

[2]: Pillow talk; surrender your dollars, urges President Erdogan (The Economist, 16th of June 2018)

|improve this question
$\endgroup$
  • $\begingroup$ I tried to answer the first part of your question. For a fuller answer to the second- what specifically are you interested in regarding "how does this differ from country to country?" Are you looking for how much different countries owe relative to GDP? Or why it matters? $\endgroup$ – AndrewC Jun 18 '18 at 12:04
  • $\begingroup$ @AndrewC Why it matters. I want to know if, why and when the measure of foreign debt to GDP ratio, which is routinely quoted as a statistic in most economic articles, differs in relevance from country to country. For instance, in the case of Turkey, the author raises the suggestion that you should be impressed by > 30 percent. Whereas, in the case of Malaysia the number is 80 percent. I am explicitly not considering the USA, since they are in an exceptional position because of the dollar reserves. Also,Venezuela, I am not considering, since it is an extreme case. I'm looking at intermediate. $\endgroup$ – Mussé Redi Jun 23 '18 at 10:58
1
$\begingroup$

The government debt represents the total liabilities outstanding that the government must (at some point) repay to investors. Generally to do so, governments tax their populace, either now, or at some future point.

The often cited Debt to GDP ratio figure is one shorthand for understanding how difficult it will be for any given government to raise the revenue necessary to cover its debts, and/or decrease government spending. If country "A" had \$100 billion in outstanding debt, and country "B" had \$400 billion in public debt, which would be in worse shape (that is, which would likely have a harder time raising the necessary funds)? Ultimately, it depends on a variety of factors, one of which being "how much can the country realistically raise in revenue?" If country "B"'s GDP is ten times the size of country "A," then even with a higher debt load, it represents a smaller relative amount owed, and might then be easier to pay back.

Of course, this is just one common, convenient shorthand statistic often used to quickly assess how sustainable a country's debt is. There are many other factors which must be considered if you're trying to comprehensively measure "default risk." But Debt/GDP is a pretty easy, useful one that has become popular over time.

|improve this answer
$\endgroup$
  • $\begingroup$ If country "B"'s GDP is ten times the size of country "A," then even with a higher debt load, it represents a smaller relative amount owed, and might then be easier to pay back. The country's GDP is already incorparated in the ratio statistic, I am considering the ratio, not the absolute value of the national debt. $\endgroup$ – Mussé Redi Jun 23 '18 at 11:05
  • $\begingroup$ There are many other factors which must be considered if you're trying to comprehensively measure "default risk." Could you name the most significant other factors? $\endgroup$ – Mussé Redi Jun 23 '18 at 11:07
  • $\begingroup$ Also, other than "default risk", or how difficult it will be for any given government to raise the revenue necessary to cover its debts, what does this ratio tell us? $\endgroup$ – Mussé Redi Jun 23 '18 at 11:08

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.