The Concept of Debt Sustainability
 
A country’s public debt is sustainable if the government can meet all its current and future payment obligations without requiring exceptional financial assistance or defaulting on its loans. A Debt Sustainability Analysis (DSA) evaluates a nation’s projected economic growth, fiscal policies, and debt profile to determine its vulnerability to financial distress.
Key Debt Sustainability Indicators
Sovereign risk is measured using specific macroeconomic ratios established by the IMF and World Bank:
  • Debt-to-GDP Ratio: The total nominal public debt divided by national GDP, measuring the country’s overall capacity to repay its debt using total economic output.
  • Debt-to-Revenue Ratio: The total public debt divided by annual domestic revenue collections, showing how heavily debt outpaces the state’s direct income.
  • Debt Service-to-Revenue Ratio: The annual cash spent on principal and interest repayments divided by total domestic revenue, indicating the percentage of tax revenues eaten up by debt before any public services are funded.

Stress Testing and Macroeconomic Shocks
 
A core component of a DSA is stress testing, which simulates how the national debt profile would perform under adverse economic shocks. Economists model the impact of a sudden currency devaluation, a drop in commodity export prices, or an unexpected contraction in GDP growth. These models help determine a country’s risk classification, ranging from Low Risk to In Debt Distress.
 
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