A macroeconomic disaster risk analysis: The case study of Chile

Abstract

From a macroeconomic perspective, the occurrence of disasters, especially high-impact events, can lead to financial stress in a country due to the sudden high demand for resources to restore affected exposed assets. Disaster risk is a sovereign risk and implies a non-explicit contingent liability that, in many cases, has a major impact on fiscal sustainability. Two risk composite indicators have been used to measure the impact that potential disasters can mean for a country: (i) The Disaster Deficit Index (DDI), which measures a country’s financial capacity to cover the economic losses generated after the occurrence of high-impact events; and (ii) A complementary index (DDI?), which indicates the fraction that the expected annual loss would represent to the annual surplus of a country. This paper describes the overall macroeconomic impact of disasters and presents DDI results for Chile, which allows national-level decision-makers to understand the economic implications of disasters for the country and the need to consider this kind of information in the long-term policies. Results of the DDI for Chile illustrate that extreme disasters would imply the need for a significant amount of budgetary resources from the government. Estimated losses would be double the available budget resources and the financing of the recovery could mean restrictions to invest in other ongoing social and development needs of the country. This macroeconomic risk in Chile may be hedged by strategically setting up a risk financial structure based on adequate loss estimation criteria, using different available alternatives such as public and private assets insurance, disasters’ reserves, contingency credits contracts, and investing in prevention and mitigation to reduce potential economic losses.