What is a Net Borrower?

A net borrower (also called a 'net debtor') is a company, person, country, or other entity that borrows more than it saves or lends. Borrowing can take the form of traditional bank lending, but it also might come in the form of Treasury debt, publicly traded bonds, or even seller financing (accounts payable).

How Does a Net Borrower Work?

Let's assume the government of country XYZ has $425 billion of overseas debt outstanding at year end and holds $400 billion of outstanding overseas bonds. Country XYZ would be a net borrower of $25 billion. In other words, the rest of the world owns more of country XYZ than country XYZ owns of the rest of the world. If the net debt continues to rise while exports fall (perhaps due to an economic slowdown), the country could have trouble meeting its obligations and debt payments.

High returns on existing assets, as well as guarantees by national banks, are often reasons lenders continue to lend to net borrowers. But note that net borrowers are more exposed to interest rate changes and thus might carry more interest rate risk.

Why Does a Net Borrower Matter?

The assets involved in the net borrower position generate flows of capital in and out of the economy and have important implications for the value of the country's currency. Foreign investors take on an increasing role in a net borrower situation, and combined with the outflows of interest and principal payments, some analysts may find that the heavier reliance on foreign capital leaves an economy vulnerable to financial crises.

Being a net borrower is not necessarily bad, however. Countries might have such strong capital-producing abilities that lenders feel secure lending there. Additionally, being a net borrower might provide capital that creates significant future inflows. Regardless, net borrower status is a component of any analysis of a country's balance of trade.