CHILE’S THRUST TOWARDS

FINANCIAL FRAGILITY1
Cristóbal Budnevich Portales
London School of Economics and Political Science (United Kingdom)
Nicole Favreau Negront
Economic Commission for Latin America and the Caribbean (eclac, Chile)
Esteban Pérez Caldentey
Financing for Development Unit within the Economic Development
Division at eclac (Chile)
Corresponding author: [email protected]

Manuscript received 4 October 2020; final version received 9 November 2020.

ABSTRACT
This paper argues that the Chilean economic model is character-
ized by three stylized facts that undermine its view as a free mar-
ket/neo-liberal success: A lower trend in the rate of growth of gdp,
increased inequality, and rising indebtedness. Since the mid-1990s
gdp growth has trended downwards. This has been accompanied
by an increase in the profit relative to the wage share. Chile has
also one of the highest levels of personal income inequality across
the oecd countries. The combined effects of the decline in trend
growth and high levels of inequality have given rise to increased
indebtedness of the household sector, especially of lower income
households, and the corporate sector. Lower trend growth, high
inequality and increasing debt are the perfect mix that can lead to a
context of financial fragility, which puts in doubt the sustainability
of the Chilean economic model.

1
The opinions here expressed are the authors’ own and may not coincide with the institu-
tions they are affiliated with. The authors are grateful for the valuable comments provided
by two anonymous referees.
http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041
© 2021 Universidad Nacional Autónoma de México, Facultad de
Economía. This is an open access article under the CC BY-NC-ND license IE, 80(315), enero-marzo de 2021 81
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
 Keywords: Growth, inequality, financial fragility, households, cor-
porate sector.
jel Classification: E25, E32, E60, O11.

EL IMPULSO DE CHILE HACIA LA FRAGILIDAD FINANCIERA

RESUMEN
Este trabajo argumenta que el modelo económico chileno se carac-
teriza por tres hechos estilizados que cuestionan el éxito atribuido
al libre mercado y al neoliberalismo: una baja tendencial en la tasa
de crecimiento del producto interno bruto (pib), acompañado de
un aumento de la desigualdad y del endeudamiento. Desde media-
dos de la década de 1990, el crecimiento del pib ha mostrado una
tendencia a la baja. Esto ha ido acompañado de un aumento de la
participación del beneficio en el pib. Este contexto ha dado lugar
a un incremento del endeudamiento del sector de los hogares y del
sector corporativo. La disminución del crecimiento tendencial, la
alta desigualdad y el aumento de la deuda pueden conducir a un
contexto de fragilidad financiera, lo que pone en duda la sosteni-
bilidad del modelo económico chileno.
Palabras clave: crecimiento, desigualdad, fragilidad financiera,
hogares, sector corporativo.
Clasificación jel: E25, E32, E60, O11.

1. INTRODUCTION

S
ince the early 1970s, Chile’s economic policy has been guided by
free market ideology, and up until the unexpected eruption of
social protests and unrest in the last quarter of 2019, the Chilean
model was considered a success story. The main building blocks of the
Chilean economic model are well known. These include the extended
privatization of the productive apparatus (with a few exceptions includ-
ing mining, energy, and basic services); the liberalization of finance
and trade; political and operational independence of the central bank
to achieve price stability; and the use of implicit and explicit fiscal rules to
discipline public spending and contribute to ensure an adequate credit
rating for the economy as a whole.

82 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

 The role of the government in Chile has been limited to maintaining a
minimum social safety net and to correct for market imperfections. The
success of the Chilean model has been predicated on the achievement
of nominal stability (price stability accompanied with low fiscal defi-
cits and public debt), low levels of unemployment (even though under
employment and informality remained high), decreasing poverty rates,
and increasing per capita income levels.
From the mid-1980s to the end of the 1990s decade, Chile doubled
its Gross Domestic Product (gdp) per capita. Later Chile became the
second Latin American country after Mexico (1994) to be accepted as a
member of the Organisation for Economic Co-operation and Develop-
ment (oecd), and in 2014, Chile was classified as a high-income country2.
Despite their merits, these achievements hardly provide a complete
and accurate picture of the Chilean economic model. A closer analysis
shows that it is built on weak foundations that undermine its portrayal
as a free market/neoliberal success.
Since the middle of the 1990s Chile exhibits a declining trend in the
rate of growth of gdp. At the same time, the functional distribution of
income clearly displays an increase in the profit over the wage share.
Declining growth trend and a rising profits share have been accompanied
by increasing private debt levels including those of households and of
the corporate sector. Currently, Chile is one of the most indebted coun-
tries in the developing world.
This paper argues that lower trend growth with increased inequality
and rising indebtedness constitute a perfect mix for a context of financial
fragility. It is divided into four sections. The second section analyses and
explains the decline in the growth trend of the Chilean economy, the
existing inequality in terms of the functional distribution of income.
and debt accumulation. The third section focusses on the notion of
financial fragility. The fourth and fifth sections analyse the existence
of financial fragility for the corporate and household sectors. The last
section concludes.

2
According to the World Bank a country is classified as a high-income country when its
income per capita exceeds US$12,055 per year.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 83
 2. A CHARACTERIZATION OF THE CHILEAN ECONOMIC MODEL

2.1. The decline in the trend growth rate

An in-depth analysis of the different dimensions of the country’s eco-

nomic development and evolution over time indicates that since the
middle 1990s, the Chilean economy exhibits a persistent decline in its
long-term growth rate. The trend rate of growth of gdp declined on
average from 6.6% in the 1990s, to 4.4% in the 2000s to a 2.9% in the
period 2010-2019. In the past two years the rate of growth of gdp has
settled at 1.5% (see Table 1).
This downward trend in gdp growth can be explained by a deteri-
orating performance in the main determinants of long-term growth,
including investment and productivity. The evolution of investment
and of its most important component, machinery and equipment (the
component with the highest technology content, which can contribute
most to economic growth), shows a loss of dynamism since the 1990s.
Total investment averaged 24.8%, 21.6%, and 23.0% of gdp for the
1990s, 2000s, and for the period 2010-2019, respectively. Machinery
and equipment follow a similar trend with 12.4% and 10.8% of gdp for
the 1990s and 2000s, respectively. In line with these observations, factor
productivity expanded at a rate of 4.6%, 1.8% and 0.8% for the 1990s,
2000s and 2010-2019, respectively
The weak productivity performance is exemplified in the decline
and low values of the economic complexity and engineering intensity
indices. The former reflects information regarding the diversity and
sophistication of a country’s exports. The latter captures a country’s
share of high technology manufacturing exports relative to that of the
United States. In the case of the engineering intensity index, the value
obtained by Chile for the 2000s means that its proportion of high tech-
nology manufacturing exports relative to the total represents 24.8% of
that of the United States.

2.2. High inequality

The decline in the growth trend has been accompanied by high levels
of inequality even though Chile has managed to significantly reduce

84 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

Table 1. Selected economic and social indicators, 1980-2019 (averages)
  1980s 1990s 2000s 2010-2019
Growth and income
gdp growth trend (percentages)a/ 3.4 6.6 4.4 2.9
gdp per capita a/
5,034 7,739 10,976 14,377
Composition of gdp by sector of economic activity
Natural resources (per cent of gdp) 15 23.9 23.4 17.5
Mining (per cent of gdp) 9.0 20.2 19.7 14.0
Manufacturing (per cent of gdp) 20.8 14.7 12.3 10.3
Finance (per cent of gdp) 9.1 14.9 17.8 20.5
Investment (per cent of gdp) 18.0 24.8 21.6 23.0
Productivity b/

Productivity growth –0.01 4.6 1.8 0.8

Relative productivity - 37.7 41.5 41.2
Research and development expen-
- - - 0.36
diture (per cent of gdp)c/
Technological intensityd/
Economic Complexity Index (eci) 0.04 0.05 –0.11 –0.02
Engineering Intensity Index (eii) 18.1 20.4 24.8 31.2
Poverty and inequalitye/
Poverty 45.1 27.4 31.5 14.2
Gini 56.2 55.8 49.7 45.2
Notes: a/ The gdp growth trend was computed using a Hendrick-Prescott filter. gdp and
its composition by sector expressed in constant 2010 US$ dollars. b/ Productivity refers to
labour productivity. Relative productivity refers to Chile’s labour productivity relative to that
of the United States. c/ Corresponds to the average for the period 2007-2017. d/ eii is the
ratio between the share of high technology manufacturing exports in Chile relative to the
share of high technology exports in the United States. Higher values of both indices imply
greater technological intensity. For eii the data reported for the 2000s decade correspond
to the 2007-2009 average. e/ Poverty headcount ratio at national poverty lines (per cent of
population). For Gini the data reported for the 1980s decade correspond to the point value
for 1987.
Source: Banco Central de Chile (2020b), World Bank (2020), oecd (2020a) and eclac (2020).

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 85
 Figure 1. Functional distribution of income, 1985-2018
(percentage of total income)

70

60

50

40

30

20

10

0
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017
Profits Wages

Source: Banco Central de Chile (2020b).

poverty3. Chile exhibits one of the highest levels of inequality in the

oecd. Since the 1990s, the Gini coefficient for Chile remained above 50
until the middle of the 2000s, dropping slightly to reach 46.6 in 2017,
surpassing the average registered for Latin America and middle-income
countries in general. Chile currently holds the 26th place in income in-
equality in the world. Moreover, when capital gains (or retained profits
and evasion corrections) are included in the measurement of inequality,
the value of Gini coefficient is above 60 and the top 1% of households
receive over 30% of total income.
Inequality is not only prevalent in terms of personal income but is
also visible when measured in terms of the functional distribution of
income. Figure 1 above shows the distribution of income between wages

3
In 1987, 45% of the country’s population qualified as being poor according to the poverty
headcount ratio at national poverty lines. The poverty ratio fell to 36% and 8.6% in 2000
and 2017, respectively.

86 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

Figure 2. Total debt by economic sector as a percentage of gdp, 2002-2020

140.0 60.0
120.0 50.0
100.0
40.0
80.0
30.0
60.0
20.0
40.0
20.0 10.0

0.0 0.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Non-financial corporate sector (Left-hand axis)
Households
General government

Note: The data corresponding to non-continuous lines are displayed on the right axis.
Source: Banco Central de Chile (2020a and 2020b).

and profits for the period 1985-2018. As the figure clearly shows the
profit share has always outpaced the wage share. Moreover, the profit
share increased significantly since the beginning of the 2000s decade
rising from 45% in 1999 to 54% in 2019. For the same period, the wage
share showed only a slight increase (40% to 43% for the same years).

2.3. Increasing debt accumulation

A lower trend growth rate and greater inequality have created the con-
ditions for debt accumulation. Figure 2 shows the evolution of total debt
by economic sector (households, non-financial corporate sector, and the
government) for the period 2002-2020. Four stylized facts characterize
the evolution and composition of debt. First, since 2007 no sector has
been spared from increasing indebtedness. Debt has steadily increased
for households, non-financial corporate sector, the financial sector, and
the general government.
Second, debt is rising faster than gdp (income). In 2007, the aggre-
gate debt to gdp ratio stood at 111.5% rising to 203% in 2020 (340% of

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 87
 gdp if the financial sector is included). As things stand, Chile is one
of the most indebted emerging market economies in the world. Third,
the accumulation of debt is concentrated in the private sector. The
bulk of the stock of debt is held by the financial sector and non-finan-
cial corporate sector. The debt stock of both sectors represented 141%
and 120% of gdp for March 2020 accounting for 40.9% and 34.9% of
the total, respectively. If the financial sector is excluded the debt of the
non-financial corporate sector represented 59% of total debt. Also,
the sector accounts for more than 60% of total external debt. The debt
of the household sector represented 52% of the total in the first quarter
of 2020. The government is the sector with the lowest debt level (33% of
gdp for March 2020 accounting for only 9.6% of the total).
Fourth, external debt has also been on the rise (30.7% of gdp in De-
cember 2007 and 82.9% March 2020) [see Figure 3] and the non-financial
corporate sector accounts for 60% of total external debt. This has major
implications not only for overall debt sustainability and for investment
and growth. Increased external debt takes on a particular importance
since the sector is characterized by currency mismatch4. The deprecia-
tion of local currencies can affect firms’ financial situation. Depreciation
not only raises debt service costs, and thus expenditures, but also swells
liabilities by increasing the local-currency value of outstanding debt.
If the collateral for the debt is likewise denominated in local currency,
depreciation will also cause this asset to lose value. This can give rise to
a mismatch such that the firm must purchase currency to balance its
accounts. Depending on its size and importance in the market and the
number of firms behaving in this way, currency purchases can create
further pressure for devaluation of the nominal exchange rate, ultimately
increasing the external debt of the firms operating in the non-tradable
goods sector. In turn, the negative effect of exchange rate depreciation
on firms’ balance sheets can inhibit investment (Caballero, 2020)5.

4
Evidence provided by Chui, Kuruc, and Turner (2016) shows that the net foreign currency
assets of non-government as a percentage of exports (a proxy for currency mismatches)
increased from –20.6% in 2007 to –58.7% in 2014.
5
Caballero’s study focuses on a sample of 15 emerging market economies. See also Bruno
and Shin (2020).

88 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

Figure 3. Evolution of total and external debt, 2002-2020
(percentage of gdp)

250 90
80
200 70
60
150
50
40
100
30

50 20
10
0 0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total debt (Left hand axis) External debt

Source: Banco Central de Chile (2020a and 2020b).

3. A CONCEPTUAL ANALYSIS OF FINANCIAL FRAGILITY

A macroeconomic context characterized by a combination of low trend

growth, high inequality and increasing debt to gdp ratios for the econ-
omy at the aggregate level can easily evolve into one characterized by
financial fragility. Financial fragility refers to a situation where growing
indebtedness generates increasing debt payments commitments that will
eventually exceed income cash flows.
Financial fragility is the result of the workings of an economy in which
lending and borrowing take place based on a decrease in the size of the
margins of safety. The margins of safety are provided by liquidity (cash
receipts and liquid assets) and allow for ‘error and variance’ (Minsky,
1975, p. 162). As explained by Minsky (1986, pp. 79-80):

The margins of safety can be identified by the payment commitments on

liabilities relative to cash receipts, the net worth or equity relative to indebt-
edness (…), and the ratio of liabilities to cash and liquid assets, that is the
ratio of payment commitments to assets that are superfluous to operations.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 89
 The size of the margins of safety determines whether a financial structure is
fragile or robust and in turn reflects the ability of units to absorb shortfalls
of cash receipts without triggering a debt deflation.

As the margins of safety decrease economic agents become more
dependent on income flows for debt payments and the ‘normal func-
tioning of financial markets to refinance positions in long-term assets.’
As a result, any disruptions in income or in financial markets, can lead
economic agents to experience difficulties in paying their debt (debt
service and or principal) leading to liquidity constraints and outright
insolvency. The size and strength of margins of safety of the different
sectors in an economy, as well as the likelihood that an initial distur-
bance is amplified, determines the robustness or fragility of an economy
(Minsky, 1986, p. 209)6.
The size and strength of the margins of safety are ‘safest’ when eco-
nomic agents can repay their debt (interest and principal) commitments
with future cash flows. The size and strength of the margins of safety
are the least safe when economic agents rely on the expectation of an
appreciation of the underlying asset(s) which sustains their debt or of a
favourable change in the underlying economic conditions (say an ap-
preciation of the exchange rate when debt is denominated in foreign
currency) to cover their liabilities (interest and principal). In between
both extremes is the case where economic agents expect future cash
flows to cover interest payments but not the principal.
The more dominant are the Ponzi and speculative regimes over hedge
financing at the agent, sector, and economy wide levels, the greater is
the thrust towards financial fragility and instability. Hedge financing
regimes depend only on expected income flows, that is, on the state
of the labour and goods and services markets, and hence on the state of
the economy in the aggregate. Speculative and Ponzi finance depend in
addition on financial market conditions. A speculative regime implies

6
In Minsky’s depiction of the financial cycle variations in the short-term rate of interest can
play a key role in generating a boom and foster financial fragility and in turning the boom
into a bust. See Foley (2003), Perrotini-Hernández, Avendaño-Vargas, and Vázquez-Muñoz
(2011) and Avendaño and Vázquez (2011) for an analysis of the role of the interest rate in
the development of financial fragility.

90 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

the possibility of rolling over debt to repay the principal. A Ponzi regime
cannot last for very long, and thus implies the possibility of increasing
debt to pay for debt, selling assets or reconfiguring portfolios to meet
payment commitments.
The prevalence of hedge, speculative or Ponzi regimes is generally
associated with the type of debt of economic agents. When debt is not
tied to the expected income streams of some underlying asset, then
that debt is considered as part of hedge financing. Consumer household
debt is generally considered hedge financing. However, depending on
its characteristics Household mortgage debt can be categorized as spec-
ulative and/or Ponzi finance. Also, consumer and household debt can
amplify business cycle fluctuations. As explained by Minsky, (Minsky,
1982, p. 30):

The typical financing relation for consumer and housing debt can amplify
but it cannot initiate a downturn in income (…). However, a part of house-
hold financing is often Ponzi; this is the financing of holdings of securities
and some type of collectible assets. A typical example is the financing of
ownership of common stocks or other financial instruments by debts.

In this regard household finance can be “destabilizing if there is a

significant portion of Ponzi finance in the holding of financial and other
assets.” (Ibid., p. 31).
However, Minsky made clear that while the financing of consumption
is mainly hedge finance, a fall in wages can transform hedge into Ponzi
finance (Ibid., p. 32). Also, reliance on consumer credit can also be a
source of financial fragility (Lavoie, 2014, p. 254). An extra complica-
tion to which we make reference in footnote 12 below is that household
surveys do not capture the debt information (especially that pertaining
to assets) and in fact may understate the extent to which households are
in a fragile financial position.
The financing regimes of non-financial corporate and financial sectors
are easily classifiable under speculative or Ponzi categories as their debt
depends on the underlying value of an asset or a given set of assets. The
following two sections of the paper provide a financial analysis —along
Minskyan lines— of financial fragility in the corporate and household
sectors in Chile.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 91
 4. FINANCIAL FRAGILITY IN THE NON-FINANCIAL CORPORATE SECTOR

4.1. Methodology and data set

The financial fragility of the non-financial corporate sector in Chile is

analyzed for the period 2010-2019, on the basis of the existing literature
that establishes measurable criteria and a threshold for distinguishing
between the hedge, speculative, and Ponzi categories. More specifically,
the criteria and thresholds used in the analysis follow the definitions by
Mulligan (2013) and by Torres Filho, Marins, and Miaguti (2017).
The criterion used by Mulligan (2013) is the interest coverage ratio
(IC). The criterion is defined as:

IC =
( Net income + interest expense )
[1]
Interest expense
Mulligan establishes the following thresholds:

IC ≥ 4.0 ⇒ Hedge
0 ≤ IC ≤ 4.0 ⇒ Speculative [2]
0 > IC ⇒ Ponzi

The criterion proposed by Torres Filho, Marins, and Miaguti (2017)

is the financial fragility index (FFI) and it is defined as:
FO + STD
FFI = [3]
EBITDA
Where FO = financial obligations, STD = stock of short – term debt,
EBITDA = earnings before interest, taxes, depreciation and amortization.
On this basis the thresholds for hedge, speculative, and Ponzi financial
positions are established as follows:
FFI ≤ 1 ⇒ Hedge
FFI > 1 
FO < EBITDA  ⇒ Speculative
  [4]
FFI > 1 
 
FO < EBITDA  ⇒ Ponzi
STD > EBITDA 

92 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

 The data set of firms used in the analyses was obtained from the
Commission for the Financial Market of Chile (cmf, Comisión para
el Mercado Financiero). The cmf publishes information of Financial
Statements of Chilean firms following the norms of the International
Financial Reporting of Securities Issuers (ifrs) and other entities op-
erating in the Chilean market.
This was complemented with data obtained from the Chilean Internal
Revenue Service (sii, Servicio de Impuestos Internos) that provides infor-
mation for the payroll of taxpayers and legal entities listed as companies
by the sii7. The data includes, among other variables, sales, number of
dependant workers, regional and urban/rural location, and main eco-
nomic activity.
The number of firms for which the criteria and thresholds defined
by Mulligan (2013) and Torres Filho, Marins, and Miaguti (2017) were
computed averages 562 for the entire period 2010-2019 with a standard
deviation of 46 (the sample differs from year to year as shown in Table 2).

Table 2. Number of firms included in the analysis by year

Year Number of firms
2010 425
2011 588
2012 575
2013 589
2014 589
2015 582
2016 567
2017 563
2018 567
2019 572
Average 562
Standard deviation 46
Source: cmf (2020).

7
The data from the cmf and sii is linked using the Registro Único Tributario which is a unique
number given to firms in order to be identifiable.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 93
 4.2. Financial fragility in the non-financial corporate sector: Results

Table 3 presents the results for all firms in the aggregate and Figure 4
by firm size. Table 3 shows an increase in the percentage of firms that
are financially fragile. Between 2011 and 2019 the percentage of firms
considered to be fragile (belonging to a speculative or Ponzi financing
regime) increased according to the two criteria considered. According
to the IC criteria, these increased from 38% to 41% between 2011 and
2019. According to the FFI criteria, the proportion of firms that are
on a fragile financial scheme increased from 16.1% to 21.6% between
2011 and 2019. Also, Table 3 reveals that the percentage of Ponzi firms
increased according to the FFI criterion from 13.7% to 19.2% between
2010 and 2019, according to the FFI criterion.
Also, we computed the number of dependent workers per firm for
each year according to the different criteria defined above. For the period
2010-2018, the average number of dependent workers that were work-
ing in firms with fragile positions were 84,483 and 17,794 according to
the IC and FFI criteria, respectively. In accordance with these criteria, the

Table 3. Proportion of total companies reporting balance sheets and income state-
ment by year characterized by a hedge, speculative or Ponzi position, 2010-2019
  IC FFI
Specu- Specu-
  Ponzi Fragilea/ Hedge Ponzi Fragilea/ Hedge
lative lative
2010 22.7 29.4 52.1 47.9 13.7 1.9 15.6 84.4
2011 17.3 20.7 38.0 62.0 14.3 1.8 16.1 83.9
2012 19.1 26.2 45.2 54.8 15.0 2.8 17.8 82.2
2013 15.6 25.1 40.7 59.3 17.3 1.5 18.9 81.2
2014 15.0 24.5 39.5 60.5 18.8 1.2 20.1 79.9
2015 17.3 22.8 40.1 59.9 17.9 2.5 20.4 79.6
2016 18.0 24.2 42.1 57.9 18.6 2.6 21.2 78.9
2017 18.0 22.4 40.4 59.6 18.5 1.7 20.2 79.8
2018 14.2 25.0 39.2 60.8 17.5 2.2 19.8 80.3
2019 15.6 25.4 41.0 59.0 19.2 2.4 21.6 78.4
Note: a/ The fragile column shows the sum of the Ponzi and speculative position.
Source: cmf (2020) and sii (2020).

94 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

above represents the 36.4% and 7.6%8 of total workers for the firms that
we could effectively calculate the indices. This gives an idea on how
many workers could have been affected, and therefore be potentially
unemployed, because of the social outbreak of the last quarter of 2019
and the current pandemic that we are facing9.
As expected, the subdivision by firm size shows that micro, small and
medium (msmes) firms tend to exhibit a higher propensity towards finan-
cial fragility than larger firms. For the period 2010-2018, the percentage
of msmes that are financially fragile reached 29% and 49% on average

Figure 4. Percentage of large and micro, small and medium sized firms that
are financially fragile using the IC and FFI criteria, 2010-2018 (averages)

60
Large
50 Micro, small and medium
sized firms
40

30

20

10

0
IC FFI

Note: The sii considers a firm as large if the annual sales are above 100,000.00 Uni-
dades de Fomento in a year, and msmes otherwise. One Unidad de Fomento is equal
to 28,686 Chilean Pesos (September 1st, 2020). The bilateral dollar-peso exchange rate
is roughly 780 pesos for one dollar.
Source: cmf (2020) and sii (2020).

8
This significant difference may be explained by the fact that the FFI index is more de-
manding in terms of requirements to comply than the IC index.
9
This number could be heavily underestimated, since we do not cover the period 2019-2020
and it does not consider the independent workers that could be hired by those companies.
Also, we do not present information for that period mentioned above, because the last
publication of the sii covers only up to the 2018 fiscal year.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 95
 compared to 17% and 41% for larger firms according to the FFI and IC
criteria, respectively. Nonetheless, the prevalence of financial fragility
among larger firms can also be significant (41% of the total according
to the IC criterion) [see Figure 4].
One possible explanation for the higher proportion of smaller com-
panies in fragile financial positions is the interest rate differential that
both groups face. During 2013-2017 the average interest rate spread for
large firms compared to micro, small and medium was 5.79%. Thus, the
price of debt is much higher for smaller firms and can undermine their
capacity to repay their obligations (oecd, 2020b).
To complete the analysis, we disaggregated the sample of companies
according to the economic sector in which they perform in accordance
with the International Standard Industrial Classification (isic). The
evidence for 2018 shows a clear tendency for certain sectors to have a
high proportion of speculative and Ponzi schemes. These include con-
struction, financial and insurance activities as well as real estate activities
(see Table 4 below).

Table 4. Proportion of companies reporting balance sheets and income

statement by year with a fragile position (speculative or Ponzi) by sector
of economic activity, 2018 (percentage of firms from the sector)
Sector FFI IC

Construction 30 72
Information and Communications 0 38
Agriculture, Livestock, Forestry, and fisheries 0 33
Mining and Quarrying 0 40
Real Estate Activities 55 42
Financial and Insurance Activities 28 36
Transport and Storage 18 59
Wholesale and Retail Trade; Repair of Motor Vehicles 23 8
Electricity, Gas, Steam, and air Conditioning Supply 19 41
Manufacturing 3 19
Source: cmf (2020) and sii (2020).

96 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

5. FINANCIAL FRAGILITY IN THE HOUSEHOLD SECTOR

5.1. The indicators

Financial fragility of households is analyzed on the basis of four indica-

tors. Three of these indicators are commonly used to measure the debt
burden of households: The first indicator is the debt service-to-income
ratio (DSIR), defined as the monthly debt payment relative to monthly
net income. It reflects a household’s financial burden, its ability to pay
off debt commitments without the need to resort to asset liquidation.
The second indicator corresponds to the debt-to-asset ratio (DAR),
which is defined as the value of the total debt with respect to total assets.
Unlike the DSIR, this indicator reflects the possibility of repaying the
debt with existing available assets. The third indicator corresponds to
the ratio between the total debt payment (interest and principal) and
monthly net income (DIR). This reflects the burden of total debt relative to
household income. It reflects the number of months it would take for
a household to pay its debt, assuming income remains constant. The
fourth indicator provides a measure of a Minskyan cushion of safety for
a household. This indicator is the financial margin of households (FM)
which is equal to net income from taxes (I) minus debt payments (DP)
and the cost of living adjusted by the number of people in a household
(ϕI )10. Income net of taxes may include three sources of income: Labor
income, pensions, and subsidies.
Formally,

FM = I − DP − ϕI [5]

We computed the first three debt indicators (DSIR, DAR and DIR)
according to whether the type of debt held corresponded to mortgage
or consumption debt (see Table 5). The results are presented by income

10
The basic living cost is equal to the poverty line defined as the average per capita income
of the poorest quintile. In addition, the basic living costs are adjusted by the number of
members for each household, in line with the oecd-modified scale, which assigns a value
of 1 to the household head, 0.5 to each additional adult and 0.3 to each child (see Am-
pudia, van Vlokhoven, and Żochowski, 2016).

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 97
Table 5. Indicators of financial fragility for the household sectors
and their respective thresholds
Financial fragility
Indicator
threshold value

Debt service-to-income, DSIR

Threshold DSIR > 0.25
Mean DSIR > 0.46
Median DSIR > 0.25
Debt-to-asset ratio, DAR
Threshold DAR > 0.75
Mean DAR > 1.61
Median DAR > 0.15
Total debt payment (interest and principal) to income, DIR
Threshold DIR > 36
Mean DIR > 12.5
Median DIR > 3.7
Financial margin of households, FM
Threshold FM < 0
Mean FM < 651,411
Median FM < 338,250
Note: The threshold, mean and median for the financial margin of households is the average
of the threshold, mean and median for the wage, pensions, and subsidies (Total income in
Chilean pesos).
Source: Balestra and Tonkin (2018) and Banco Central de Chile (2018b).

deciles for both the mean and the median (see Table 7a). For the finan-
cial margin we present the results for total income, labor and pension
income and labor income only.
The financial fragility of households was assessed on the basis of the
mean, the median and threshold values for all indicators. By extension,
the percentage of all households that find themselves above or below
the mean, median or a given threshold was obtained. The values of the
mean, median and thresholds for all the indicators referring to total debt
are shown in Table 5 below.
The choice of thresholds values for the DSIR, DAR and DIR, follows
the methodology of the Balestra and Tonkin (2018) and the Banco Cen-
tral de Chile (2018a and 2018c). The rationale behind these criteria is

98 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

based on the vulnerability of households when facing possible scenarios
of income decline. Those households that use more than 25% of their
monthly income for debt payments (DSIR) are in a situation of financial
vulnerability, as well as those households whose debt value exceeds 75%
of the value of their assets (DAR), or those who take more than 36 months
to liquidate their full payment commitments (DIR) if they maintain their
monthly income constant. In the case of the financial margin (FM) the
threshold value was set at zero since a value less than zero means that
households are not able to face their debt and consumer expenses with
their available income sources.
The data used for the computation of the indicators was obtained
from the latest Household Financial Survey 2017 (Encuesta Financiera
de Hogares 2017) published by the Banco Central de Chile (2018b). This
dataset is representative at the urban national level, with a total of 4,549
households interviewed. It comprises 128 variables including, among
others, household and/or individual characterization, as well as asset
values, debt, income, and financial products11.

5.2. An analysis of the empirical results12

Table 6a presents the percentage of households that are above the fi-
nancial fragility threshold, and the mean and median of each of the
indicators considered (DSIR, DAR, and DIR) by type of debt. Table 6b
presents the results of households below the same indicators for FM by
source of income. The results for total debt show that the percentage of
households that are above the financial fragility threshold, median and
mean according to the DSIR, DAR, DIR and FM criteria are on average
43.7%, 37.4%, 28.2%, and 45.5% of the total, respectively.

11
The financial household survey provides incomplete information. This is due partly
because of the sensitivity of the type of questions asked (Banco Central de Chile, 2018a
and 2018b). Questions relating to the possession of assets are generally not answered or
simply avoided either due to lack of financial education or apprehension to declare assets.
Also, the survey underestimates the value of debt. It includes per household information
only on the main three sources of debt when debt is associated with credit cards, lines
of credit and consumer loans and the four main sources of debt when debt is associated
with credit card issued by business houses.
12
These results included households which do not have or report income neither assets.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 99
 Table 6a. Percentage of households above the mean, median
and each of the thresholds by type of debt
Type of debt Indicator DSIR DAR DIR
Threshold 50.8 29.7 7.4
Total debt Mean 29.6 23.9 26.4
Median 50.6 58.7 50.8
Average 43.7 37.4 28.2
Threshold 46.8 29.2 36.6
Consumer debt Mean 29.8 25.7 24.8
Median 50.9 59.5 50.9
Average 42.5 38.1 37.4
Threshold 21.2 41.1 16.3
Mortgage debt Mean 22.9 60.3 29.8
Median 52.3 68.5 52.2
Average 32.1 56.6 32.8
Source: Balestra and Tonkin (2018) and Banco Central de Chile (2018b).

Table 6b. Percentage of households above the mean, median

and each of the thresholds by source of income
Labor and
Indicator Labor income Total income
pension income
Threshold 26.5 21.6 20.8
Media 65.2 65.8 65.7
Median 50.0 50.0 50.0
Average 47.2 45.8 45.5
Source: Balestra and Tonkin (2018), Ampudia, van Vlokhoven, and Żochowski (2016)
and Banco Central de Chile (2018b).

The decomposition of debt into consumer and mortgage debt shows

that, while on average, a significant percentage of households are above
the threshold, median, and mean for both types of debt, financial fra-
gility is more prevalent in the case of consumer debt for DSIR and DIR.
In the case of consumer debt, 42.5% and 37.4% of households on av-
erage are above the financial fragility threshold, mean and median on the

100 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

basis of the DSIR and DIR criteria, respectively. For mortgage debt the
percentages are lower (32.1%, and 32.8% on average for the same criteria).
However, in the case of DAR the opposite situation occurs. Fragility is
more prevalent in mortgage than in consumer debt (56.6% and 38.1% of
the total, respectively) This could be explained because the declared value
of assets is generally underestimated in this type of surveys. The same result
is obtained when using the threshold for vulnerability fragility proposed
by the Banco Central de Chile (2019) and Balestra and Tonkin (2018).
In the case of the FM, 20.8% of households are found to be in a
financial fragility situation when all the different sources of income
comprising salaries, pensions and subsidies are included. This increases
to 26.5% when only the most accessible form of income, labor income,
is considered (see Table 7b).
The analysis by income deciles indicates that debt fragility is concen-
trated at the lower bound of the income distribution. According to the
DSIR ratio, the DAR ratio, the DIR and the FM, 74.4%, 47.2%, 33.3%
and 72.0% of the population in the lowest deciles are in a situation of
financial fragility respectively (see Tables 7a and 7b).

Table 7a. Percentage of households in a financial fragile by criterion, 2017

Type of debt and income decile
DSIR DAR DIR
Income
Type of debt Threshold Threshold Threshold
bracket
(0.25) (0.75) (36)
Decile 1 74.4 47.2 33.3
Decile 2 57.6 47.1 5.0
Decile 3 51.0 36.3 3.2
Decile 4 55.2 33.9 4.5
Decile 5 52.3 30.8 7.7
Total debt Decile 6 47.1 27.3 6.5
Decile 7 46.3 28.5 5.4
Decile 8 45.8 22.9 5.5
Decile 9 50.2 22.1 6.8
Decile 10 41.9 12.1 5.8
Total 50.8 29.7 7.4

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 101
 Table 7a. Percentage of households in a financial fragile by criterion, 2017
Type of debt and income decile (continued…)
DSIR DAR DIR
Income
Type of debt Threshold Threshold Threshold
bracket
(0.25) (0.75) (36)
Decile 1 72.8 49.0 32.3
Decile 2 55.5 48.5 3.4
Decile 3 48.4 38.2 0.5
Decile 4 52.2 32.1 0.0
Decile 5 45.6 28.5 0.9
Consumer debt Decile 6 44.6 26.5 0.0
Decile 7 42.4 27.8 0.5
Decile 8 41.7 22.4 0.1
Decile 9 39.6 17.8 0.2
Decile 10 38.7 9.8 0.0
Total 46.8 29.2 2.7
Decile 1 99.7 89.1 90.9
Decile 2 57.6 83.2 17.8
Decile 3 40.8 70.0 18.4
Decile 4 25.0 63.0 18.0
Decile 5 16.6 43.4 21.1
Mortgage debt Decile 6 22.3 37.3 13.0
Decile 7 14.1 29.3 9.0
Decile 8 14.9 25.3 9.8
Decile 9 10.8 14.8 8.4
Decile 10 8.9 5.4 8.2
Total 21.2 41.1 16.3
Note: These results include households which do not have or report income nei-
ther assets.
Source: Banco Central de Chile (2018b).

102 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

Table 7b. Percentage of households that are considered to be financially
fragile by financial margin, source of income and income decile, 2017
Labor and
Income Bracket Labor income Total income
pension income
Decile 1 84.9 75.5 72.0
Decile 2 47.5 36.6 34.4
Decile 3 31.7 26.4 25.1
Decile 4 23.2 21.2 20.5
Decile 5 18.0 12.8 13.3
Decile 6 15.9 12.9 12.9
Decile 7 15.0 10.1 8.9
Decile 8 8.9 6.5 6.8
Decile 9 7.5 5.0 5.1
Decile 10 12.0 9.1 9.2
Total 26.5 21.6 20.8
Note: Total income includes subsidies.
Source: Banco Central de Chile (2018b).

6. CONCLUSION

As the eruption of the social outbreak that took the country by storm in
the last quarter of 2019 and shook the conscience of the Chilean society
demonstrate, there are important cracks in the Chilean economic model
that have barely received the attention of policy makers over the years.
Since the mid-1990s the rate of growth of gdp began trending down-
wards due in great part to the failure to diversify the structure of produc-
tion and to create capabilities at the firm and social levels. At the same
time, the unequal distribution of income, a long-standing problem of
the Chilean society, as rightly identified by Nicholas Kaldor in the 1950s,
have remained acute (Kaldor, 1956). The consolation of a decline in the
Gini coefficient in the 2000s during the commodity boom is marred
by the fact that this index does not include capital gains which are a
characteristic feature of rising commodity prices. Also, the functional
distribution of income shows the ascendency of the profit over the

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 103
 wage share. Both a declining growth trend and impending inequality
are intertwined with a third feature of the Chilean economic model:
raising private debt.
A declining growth trend, high inequality and increasing debt can
easily pave the way for a context of financial fragility and the interaction of
these factors within the present context can lead to perverse development
dynamics. The effects of Covid-19 have exacerbated these trends, the
unemployment rate could exceed 20%13, the growth rate will plummet
by –7% in 202014, and poverty and inequality levels are bound to sharply
increase. Considering that a portion of the population and firms has seen
their incomes diminished the current state of financial fragility may be
greater than that presented in this paper. Addressing financial fragility
requires active policies in the real rather than the financial sector and
a conscious policy of social solidarity, a key element for development.
Failure to address these issues can seriously undermine the social and
economic gains that have been achieved as the social unrest that erupted
in 2019 has reminded everyone. 

REFERENCES

Ampudia, M., van Vlokhoven, H., and Żochowski, D. (2016). Financial fragility
of euro area households. Journal of Financial Stability, 27(C), pp. 250-262.
https://doi.org/10.1016/j.jfs.2016.02.003
Avendaño, B., and Vázquez, A. (2011). Inestabilidad financiera y política mo-
netaria en México, 1990-2008. Investigación Económica, 70(275), pp. 63-92.
http://dx.doi.org/10.22201/fe.01851667p.2011.275.24263
Balestra, C., and Tonkin, R. (2018). Inequalities in household wealth across oecd
countries: Evidence from the oecd Wealth Distribution Database [oecd
Statistics Working Papers no. 2018/01]. oecd Publishing, Paris. https://
doi.org/10.1787/7e1bf673-en
Banco Central de Chile (2018a). Encuesta Financiera de Hogares 2017. Santiago:
Banco Central de Chile.

13
Considering the protection of employment law, which suspends the contractual relation-
ship between employees and employers. The official last date was 13.1%.
14
According to eclac, and the International Monetary Fund (imf).

104 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041

Banco Central de Chile (2018b). Encuesta Financiera de Hogares. Manual
metodológico. Santiago: Banco Central de Chile.
Banco Central de Chile (2018c). Encuesta Financiera de Hogares. Glosario.
Santiago: Banco Central de Chile.
Banco Central de Chile (2019). Informe de Estabilidad Financiera Primer Se-
mestre 2019. Santiago: Banco Central de Chile.
Banco Central de Chile (2020a). Informe de Estabilidad Financiera Primer
Semestre 2020. Santiago: Banco Central de Chile.
Banco Central de Chile (2020b). Base de Datos Estadísticos. Cuentas Nacionales.
[online] Available through: Banco Central de Chile <https://si3.bcentral.
cl/siete/> [Accessed 04/08/2020].
Bruno, V., and Shin, H.S. (2020). Currency depreciation and emerging market
corporate distress. Management Science, 66(5), pp. 1935-1961. https://doi.
org/10.1287/mnsc.2018.3280
Caballero, J. (2020). Corporate dollar debt and depreciations: All’s well that ends
well? [bis Working Papers no. 879]. Bank for International Settlements,
Switzerland.
Chui, M., Kuruc, E., and Turner, Ph. (2016). A new dimension to currency
mismatches in the emerging markets: Non-financial companies [bis Working
Paper No. 550]. Bank for International Settlements, Switzerland.
cmf (2020). Estados financieros bajo estándar ifrs de emisores de valores y otras
entidades. [online] Available through: Comisión para el Mercado Financiero
<http://www.cmfchile.cl/institucional/estadisticas/estadisticas_ifrs.php>
[Accessed 08/09/2020].
eclac (2020). CEPALSTAT. Databases and Statistical Publications. Statistics
and Indicatiors. [online] Available through: Economic Commission
for Latin America and the Caribbean <https://estadisticas.cepal.org/
cepalstat/web_cepalstat/estadisticasIndicadores.asp?idioma=i> [Accessed
04/08/2020].
Foley, D. (2003). Financial fragility in developing economies. In: A.K. Dutt
(ed.), Development Economics and Structuralist Macroeconomics (Chapter
8). Cheltenham: Edward Elgar Publishing.
Kaldor, N. (1956). Economic problems of Chile. In: N. Kaldor, Essays on Eco-
nomic Policy (pp. 233-287). New York: Holmes & Meier Publishers, Inc.
Lavoie, M. (2014). Post-Keynesian Economics. New Foundations. Northhamp-
ton: Edward Elgar.
Minsky, H. (1975). John Maynard Keynes. New York: Columbia University Press.

Budnevich Portales, Favreau Negront and Pérez Caldentey • Chile’s thrust towards financial fragility 105
 Minsky, H. (1982). Can “it” happen again? In: Essays on Stability and Finance.
New York: M.E. Sharpe.
Minsky, H. (1986). Stabilizing an Unstable Economy. New Haven, CT: Yale
University Press.
Mulligan, R.F. (2013). A sectoral analysis of the financial instability hypothesis.
The Quarterly Review of Economics and Finance, 53(4), pp. 450-59. http://
dx.doi.org/10.1016/j.qref.2013.05.010
oecd (2020a). Observatory of Economic Complexity. [online] Available through:
Organisation for Economic Co-operation and Development <https://oec.
world/en/profile/country/chl#economic-complexity> [Accessed 04/08/2020].
oecd (2020b). Financing SMEs and Entrepreneurs: An oecd Scoreboard.
oecd, Centre for Entrepreneurship. SMEs, Local Development and Tourism.
[online] Available through: Organisation for Economic Co-operation and
Development <https://stats.oecd.org/Index.aspx?DataSetCode=SMES_
SCOREBOARD#> [Accessed 23/08/2020].
Perrotini-Hernández, I., Avendaño-Vargas, B.L., and Vázquez-Muñoz, J.A.
(2011). Anti-inflationary policy and financial fragility: A microeconomic
analysis case study of Mexico, 1990-2004. In: I. Perrotini-Hernández, G.
Angeles-Castro and H. Ríos-Bolivar (eds.), Market Liberalism, Growth, and
Economic Development in Latin America (pp. 233-249). New York: Routledge.
sii (2020). Nómina de Personas Jurídicas. [online] Available through: Servicio de
Impuestos Internos <http://www.sii.cl/sobre_el_sii/nominapersonasjuridicas.
html> [Accessed 10/03/2020].
Torres Filho, E., Martins, N., and Miaguti, C. (2017). Minsky’s financial fragility:
An empirical analysis of electricity distribution companies in Brazil (2007–15)
[Levy Economics Institute Working Paper no. 896]. Levy Economics Institute
of Bard College, Annandale-on-Hudson, NY.
World Bank (2020). Word Development Indicators (wdi). [online] Available
through: The World Bank <https://databank.worldbank.org/source/world-
development-indicators> [Accessed 04/08/2020].

106 IE, 80(315), enero-marzo de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.315.77041