Evaluating the Chilean Government’s Debt Denomination

This paper proposes a framework to assess the convenience of the current public debt denomination of the Chilean Government, through its implications on fiscal budget risk management. A “Value at Risk” methodology is proposed to compare alternative denominations regarding currency and interest rate. If the correlations found between the main factors affecting the fiscal result are valued at their point estimates, the exercise suggests that swapping the current debt denomination in fixed interest payments to variable payments indexed to Libor or government bond rates would significantly reduce fiscal results' volatility. The results also point to reduce current currency denomination in US dollars towards a stronger position in Euros or British Pounds. A more statistically rigorous analysis that considers the volatility of estimated correlations, however, recommends taking previous conclusions with caution.