Investors fear that Colombia’s pension bill may cause a drop in national savings as workers leave private pension plans and migrate to the public system, according to analysts.
(Bloomberg) — Investors fear that Colombia’s pension bill may cause a drop in national savings as workers leave private pension plans and migrate to the public system, according to analysts.
President Gustavo Petro’s proposed pension overhaul could mean that about 85% of worker contributions go to the public system, potentially hurting demand for local bonds and stocks.
The government hasn’t provided clear guidance on the impact of its plans on aggregate savings, said Jorge Llano, VP of markets development with the capital markets self-regulating agency AMV.
In the absence of the bill, pension fund assets could reach the equivalent of about 43% by 2045, whereas with the reform that figure will be about 20 percentage points lower, Llano said.
Llano participated in “Colombia Market Talk” on April 12 at Bloomberg’s Bogota office. The other attendees were:
- Jackeline Pirajan, an economist at Scotiabank Colpatria
- Daniel Nino, pension fund manager of the Colombian pilots’ industry, CAXDAC
Savings Fund
Petro’s proposal would create a public fund to save a portion of workers’ contributions. Finance Minister Jose Antonio Ocampo said this will create a major new player in the public debt market, and will ensure that demand for local peso bonds remains robust.
“My great concern about the reform is how the operation of this fund is going to be regulated, which will manage significant money in the next 20 years,” Nino said. “It is still up in the air to know how the money is going to be invested.”
Llano said it isn’t ideal that the government could end up managing one of the main buyers of its own debt.
Colombian private pension funds have around 360 trillion pesos ($81 billion) of assets under management and hold a quarter of the $104 billion peso-denominated government bonds.
Asset Rally
The risk premium investors demand to hold Colombian assets has fallen from highs reached in October, as the Petro administration meets pushback from lawmakers over its ambitious reform agenda, according to Scotiabank’s Pirajan.
While the cost of insuring Colombia’s bonds against default fell more than peers this month, the nation’s bonds are still seen as riskier than those of Chile, Peru, Mexico and Brazil.
Investors have been trying to gauge the whether the government has the strength congress to pass its reform — including also changes to the health system and labor laws — that seek to overhaul Colombia’s conservative economic model.
Last month Petro suffered his first major setback when his government was forced to withdraw a bill that sought changes to the political system. And in March, a high court suspended a decree with which he looked to cut utility bills.
“Congress and the courts have shown they play a key role in blocking” some of the changes, Pirajan said. Investors “see that it’s very unlikely that radical changes will pass. They’ll be watered down.”
Colombia’s peso bonds have gained 18% this year, the most among emerging market peers, which have risen an average of 3% in the same period, according to a Bloomberg index.
Pirajan forecasts that Colombia’s securities will gain further as soon as inflation shows clear signs it has peaked, which will allow the central bank to end its interest rate hiking cycle.
OTHER COMMENTS
- Llano
- The opposition in congress to the pension reform will be less than that toward plans to reform the labor market and the health system
- Pirajan
- The government should be transparent about how much risk the fund will take, so investors can calculate what is implied in terms of subsidies
- Nino
- The government will have to moderate its proposals if it wants to get them approved, among other reasons because time is short. The reforms need to be approved in the first half as lawmakers will focus on the October regional elections after that
Read previous editions of Colombia Market Talk
- Soaring inflation is a big threat to Petro policy agenda
- Experts say the peso’s drop casts doubt on Petro’s energy plan
- Ex-central bank officials expect higher interest rates
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