A bill in Peru has sparked market unease, proposing that citizens withdraw from their retirement funds.
This move might necessitate pension funds liquidating assets, potentially freeing up $7 billion for withdrawals.
Set for a Congressional vote on Thursday, the anticipation has led investors to shy away from stocks, foreseeing asset liquidation by pension fund managers if the bill passes.
Since March 25, following the bill’s initial committee approval, Lima‘s stock index has plummeted by nearly 7%.
Once outperforming regional benchmarks, it now trails due to the looming pension reforms.
Credicorp Capital’s Daniel Guzmán highlighted the negative market impact of the committee’s nod.
JPMorgan Chase & Co. also flagged rising risks with the bill’s potential approval.
The pandemic has already strained Peru’s private pension system, prompting legislative withdrawals totaling $24 billion, as reported by banking regulator SBS.
Frustration with fund managers over insufficient pensions and steep fees fueled this drain.
Legislator José Luna champions the bill, seeing it as vital for financial access amid economic slowdowns.
He criticizes pension fund managers for exploiting workers. Many Peruvians, working informally, miss out on mandatory retirement plan contributions.
More than 6 million workers have dipped into their pensions through congressional green lights.
Peru’s Private Pension Landscape
Peru boasts four primary private pension fund operators, including ownership by entities like Credicorp Ltd. and Colombia‘s Grupo de Inversiones Suramericana SA.
BancTrust & Co. warns that the reform might push pension managers towards selling Peruvian sovereign bonds to cover withdrawals.
This could significantly sway internal interest rates, affecting financing costs across the board, the London-based bank advises.
Following the committee’s pension withdrawal endorsement, Peru’s government debt, particularly sol-denominated bonds due in 2031 and 2037, saw a decrease.
However, dollar-denominated debts were less impacted. JPMorgan estimates pension funds invest 22% of their assets in Peruvian sovereign bonds.