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Lima Stock Exchange Director describes fallout from AFP’s exodus of funds

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The president of the Lima Stock Exchange said savings outflows from the country’s private pension fund system increased bank deposits and liquidity to the detriment of the local capital market.

Perus four private pension fund managers, or AFP as they are called, are important players in the capital market.

On Wednesday, the government released a law that allows AFP members who have not contributed to their pension funds for 12 consecutive months or more to withdraw up to 17,200 soles (US $ 4,791).

Earlier this year, Congress in Perus was forced by legislation allowing AFP contributors to withdraw 25% of their savings.

AUM stood at 152 billion soles at the end of October, up from 176 billion soles in January, according to data from SBS. In May, around 57% was invested in the local market, with 22.3% corresponding to government bonds, over 9% to corporate stocks and around 7.5% to private corporate bonds ( non-financial system), including project bonds.

The funds withdrawn first went to the banks, increasing their deposit base and their liquidity.

Claudia Cooper, also former Minister of the Economy and banker, spoke of the positive fallout for banks. But I think that [the exit of funds from AFPs] isn’t good in the long run, Cooper said in a Tuesday webcast hosted by the Canadian Council for the Americas, a private sector link between Canada and Latin America and the Caribbean.

Cooper said: Pension funds are key institutions in financial markets, and financial markets are essential for long-term funding. If we want investments in agribusiness, it is not the banks that will give that; if we want investments in infrastructure, banks are not [going to invest]. And the capital market is actually a competitor of the Peruvian banking system which, again, needs more competition.

Some of the AFP funds withdrawn are expected to leave savings accounts and enter the housing market.

Cooper added that the financial system is very strong and able to help finance a return to growth. Liquidity is good, the financial system is fine. What we need now is an investment and [formal] jobs.

The pension withdrawal law was challenged by then-president Martn Vizcarra, but it was approved and signed by his successor, congress leader Manuel Merino, during his brief tenure this month. – here before resigning amid the protests and being replaced by current President Francisco Sagasti.

Lawmakers in the country’s fragmented unicameral congress initially asked for permission for eligible affiliates to withdraw 100% of their savings.

Supporters say people need funds to help weather the coronavirus crisis, while those who oppose such measures say they are reducing the amount of future pensions, among other negative impacts.

SBS has 15 calendar days to draw up the corresponding rules of procedure.

SBS recently published rules governing an upcoming tender for a contract to attract new workers to the AFP system.

A second bill on the withdrawal of pensions is also in Congress in Chile.

Popular among Peruvians, Vizcarra was not represented in Congress and had previously locked horns with lawmakers to fight corruption.

In this context, a multi-party commission worked on proposals for a broader pension reform.

READ ALSO: Latin American private pension systems constantly threatened by politics

Episodes of political chaos are not uncommon in Peru, but fuel challenges and uncertainty in governability. However, the country has a history of economic policy continuity, a key factor in the stability of public finances in recent years.

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