CEPAL Review no. 124

216 CEPAL Review N° 124 • April 2018
debt. If the actual balance is positive, it serves as a source of funds; otherwise, it is added to the uses
of the resources obtained through debt. 20
Having specified the movements that occur “above the line” and “below the line”, the equation
to determine the stock and flow of the debt takes the following form: 21
with (8)
Where ΔFRPt is the variation in FRP in period t. It can then be seen that FRP is separate from
the net debt component in dollars. Thus, the variation of the debt stock for a year as a percentage of
GDP is given by the equation:
(9)
By performing a decomposition similar to equation (5), and given that the actual balance is equal
to the CAB plus the cyclical adjustment of income, the debt movement as a percentage of GDP can
be related to the CAB target as follows:
(10)
where is the CAB target as a percentage of GDP in year t, and ac t
is the cyclical adjustment as
a percentage of GDP in year t.
(b) Projections of net debt to 2025
To exemplify the functioning of the dynamic model developed in the foregoing sections, the
Chilean central government’s net debt path is simulated to 2025. The initial values ​of the main variables
used in this exercise are consistent with the 2018 budget and the public-sector financial projection
for 2019-2021, as reported by the Ministry of Finance in the Public Finance Report (DIPRES, 2017b).
(i)
The following describes the two alternative macroeconomic scenarios used in the analysis: 22
Trend scenario: the projected position in the 2018 budget and the public-sector financial projection
for 2019-2021 and convergence to its trend values ​are considered as the initial position. Among
other things, it is assumed that:
20
On the terms “Sources” and “Uses”, see information provided in the footnote of Table I.17 of the report Evaluación de la Gestión
Financiera 2017 (DIPRES, 2017c).
21
Treasury liabilities recorded “below the line” include recognition bonds (Arenas and others, 2009). Following Vergara (2002) it
was decided to only count recognition bonds already issued within the debt. Thus, the sustainability exercise remains valid,
since non-payment of a recognition bond is the same as default on another type of bond, in terms of government solvency.
22
The macroeconomic variables used in the simulation of each scenario are presented in annex A3. For further analysis of the
model used, see Bravo and others (2014).
Fiscal sustainability and the cyclically adjusted balance policy: methodology and analysis for Chile