Question

What factors should be considered when determining whether or not foreign debt is a problem for a country? Do you think Australia’s foreign debt is a problem? Do you think Argentina, Chile or China’s foreign debt if any is a problem? Discuss briefly.

Answer 1

Answer:
Following factors should be considered when determining whether or not foreign debt is a problem for a country :

Positive Aspects of Taking Debt:

• Developing countries don't have enough money to grow at the rate what they are hoping for, so to increase the growth and development of their nation they take debt from international bodies and other developed countries and use them in the development of their own country.
• Rate of growth and development of the nation increases a lot if debt is taken and used properly.
• They are able to achieve economic stability and good standard of living for their citizen in much easier and less time if debt is used properly.
• High rate of growth by taking debt and repaying them on time also attracts foreign and private investors to invest more in the developing nations which is win win situation for both.

Negative Aspects of Taking Debt:

• Debt Trap by Developed nations like China : Developed nations like China use their power of money to give loan to the nations which are in no state to repay them back and interest rates which is being charge to them is also high. Once they are unable to pay the debt, China takes strategically important resorces like Ports or Airport for their personal use which will help in the development of china at the cost of developing countries. Many countries in Asia and Africa like Srilanka, Pakistan and many Africal countries have fallen in trap of this.
• Unexpected devaluation in exchange rate can increase the real value of debt interest payments denominated in dollars.
• A decline in comodity price which leads to decline in terms of trade and relatively fall inexport earning also affect the debt repayment power of the country.
• Growing level of debt can discourage foreign and private investment which affects the development of the country in negative way.

Net foreign debt owned by individuals, corporates and government himself from foreign companies and international bodies is around $1 Trillion, which is 60% of Australia GDP. This is making Australia highly susptible to rising interest rates in Australian households. This number puts Australia to the top of the indebted countries in the world.
the banking sectors have borrowed around $800 billion from offshore which puts lot of stress in the banking sector as well. Another big risk is when foreign investors loose their faith in Australia's capacity to repay the debt which may lead to collapse of the whole economy. Even growth rate of Australia is also not that great because of interest which they need to pay over their debt.

Situation of Argentina's debt is also similar to Australia, their currency got devalued 2/3 of its value since 2018. Inflation is very high there, growth rate is also sub standard. Argentina's government asked relief from IMF but that along cannot help Argentina. The expectation is government will follow international convention and default to foreigners before its economy collapse all together.

Chile and China have limited debt in their economy. Chile debt to GDP ratio is 25.56% which is more but can be managed by changing few of the fiscal policy by the government. China total debt to GDP ration is around 30% which is manageable because growth rate of Chinese economy is very good. China is growing at the rate of 8% year on year which gives foreigner confidence that it can repay the loan without much issue.

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