Definition of Debt Service Ratios – A country’s debt service ratio measures the amount of debt interest payments to the country’s export earnings. For example, if a country has export revenue of £100bn and pays £15bn interest payments on its external debt, then its debt service ratio is 15%.
A rising debt service ratio is often the sign of an imminent economic crisis.
Debt service ratios may rise because of:
- A fall in exports
- Lower price of commodities which are main exports of a country. e.g. Venezuala may rely on oil exports
- Higher Borrowing
- Higher interest rates increasing cost of debt repayments
- Devaluation increasing cost of external repayments.
Debt Service Coverage Ratio
This is measured the other way around and measures the ratio of net income to debt service. it is widely used to measure the strength of mortgage investments.