What Is a Debt Ratio?

The debt ratio (Foreign Debt Ratio) is the ratio of the balance of external debt to export income. When the debtor country does not have foreign exchange reserves or does not consider foreign exchange reserves, this is a major indicator of the external debt burden and external debt risk. The internationally accepted safety standard for debt ratios is less than 100%.

Debt ratio

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There are only two factors that determine the change in the debt ratio. One is the external debt balance, and the other is the export scale. In the context of a linear upward trend in the balance of external debt, the change in China's debt rate depends on the export growth rate. If the export growth rate is faster than the external debt growth rate, the debt rate will decrease. Slower than the external debt growth rate, the debt rate increased, as was the case before 1994. Therefore, if we want to alleviate the pressure on the debt rate, we must either reduce the external debt balance or expand the export scale. Of course, the latter seems to be more proactive.

However, measuring the solvency of a country s external debt using the debt ratio is actually not scientific or reliable, because export income is usually settled by importing foreign exchange first, and there is still a surplus (i.e., a trade surplus) when paying import foreign exchange. ), The surplus can be used to repay external debt. In order to ease the pressure on foreign debt, many countries usually tighten imports, and this is the reason. The assessment of the solvency of our foreign debts was not suitable to use the debt ratio indicator before 1994, because during this period, China's trade deficit almost every year, export income not only failed to repay foreign debts, due to the shortage of foreign exchange reserves, in fact, foreign debts were used Balance the trade deficit. This is the fundamental reason why China s debt ratio was operating in a safe area, but the debt reserve / external debt ratio was operating in an emergency state during this period.