Capital flows, the role of non-financial corporations and their macroeconomic implications: an analysis of the case of Chile

This chapter argues that, contrary to the conventional wisdom of mainstream economics, the behaviour of the balance-of-payments and more specifically that of the capital/financial account is explained by financial and not real factors. Moreover, the chapter argues that this behaviour does not reflect the interactions of the economy in the aggregate but that it is rather sector specific. The evolution of the capital account is explained by the rising importance of the international bond market and by the financial position of the non-financial corporate sector, and more precisely, by a minority of firms that issue debt in the international capital markets. The analysis shows that the financial position of the international bond issuing firms is rather vulnerable and fragile. Roughly of these firms have liquidity constraints, while the majority are overleveraged and show declines in profitability. Under these conditions the international bond market is not a source of finance of real activity rather a means through which these firms can guarantee their financial survival. International bond issuing firms use the liquidity obtained in the internal bond market to buffer up their balance sheet rather than use it to finance investment. Indeed, the existing literature shows that beyond a given leverage threshold firms tend to increase their cash and liquid assets and reduce investment. The decline in profitability strengthen the inverse relationship between debt and investment.