What is Sovereign Debt?
Sovereign debt is a central government's debt. It is debt issued by the national government in a foreign currency in order to finance the issuing country's growth and development. The stability of the issuing government can be provided by the country's sovereign credit ratings which help investors weigh risks when assessing sovereign debt investments.
How to Measure Sovereign Debt
Sovereign debt is can be measured using a variety of different metrics. Often times, these metrics are used in order to determine if a country’s sovereign debt is too high given its gross domestic product (GDP) or abilities to tax its citizens.
But these factors should also take into account a country’s GDP growth rate, which can dramatically influence its future ability to repay debt.
The three most popular metrics are:
- Total Public Debt – The total public debt is the total amount of debt outstanding. But without context, this figure isn’t very informative and can be misleading. As a result, most experts look towards Debt-to-GDP and Debt per Capita as common measures.
- Debt as a Percent of GDP – Debt as a percentage of the gross domestic product is simply the total public debt divided by GDP. Countries with a debt greater than their GDP (or a ratio over 100%) are generally considered to be over-indebted.
- Debt per Capita – Debt per capita is simply the total debt divided by the number of citizens. A debt per capita that is in excess of per capita income reduces the likelihood that the government will be able to make up its shortfall through traditional taxation.
International investors can find the levels of public sector debt via the World Bank, CIA World Factbook, or individual central bank websites.