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Today the new withdrawal of 10% of the AFPs is being voted on in the Senate Constitution Committee until it is fully dispatched, where it was already approved in general. Prior to the vote, the president of the Central Bank (BC), Mario Marcel, came to present the effects that this measure would have on both the economy and the markets.
In this sense, Marcel stated that the project “should consider mitigating elements to face risks of negative effects in the short term (…) First, with regard to the deadlines for the delivery of funds, the project The current one considers only one payment in 30 days, versus the previous project with two payments in 40 days. This creates liquidity pressures on the funds but also operational problems throughout the process that follows. “
In this regard, he said that “the issue of terms is not only how pressured the pension funds are to sell their assets, but after that there are a series of logistical challenges, which have to do with the transfer of funds to banks, the availability of funds for members, the availability of cash for those who want to withdraw cash. All that logistics chain requires time to be able to operate efficiently ”.
In this sense, he asked to extend the term of delivery of funds to members, at least for payments of larger amounts. He also warned that the change in pension funds, which occurs simultaneously with the liquidation of assets, generates noise.
However, he pointed out that the third risk factor is the market’s expectations regarding a sequence of future withdrawals, “because by breaking the one-time logic, this can affect institutional credibility, it can raise risk premiums, the AFPs they will tend to take more liquid and not more profitable positions to face future withdrawals, the room for action for the BC will be less in the face of more permanent changes in the domestic capital market ”.
The BC president also pointed out that the effect on inflation of this second withdrawal could be greater than what happened after the first.
Regarding the impact on prices, Marcel explained that “there is a limitation of stocks available for purchase. What we have observed in recent months is that there has been no replenishment of stocks in these categories, in these products, therefore, it is possible that a second withdrawal, in which there will be spending concentrated on these items, will probably be found with greater restrictions on the stock side, and the pressure on prices is greater, therefore, it is possible that in a second withdrawal we will have a somewhat greater impact on inflation ”.
He explained in a graph that they put together “indices of sales and imports for automobiles, electronic products and household appliances, for clothing and footwear, and we see that in all these cases, even though sales have increased, imports have not increased. And on the other hand, in the Business Perceptions Index applied by the BC, the inventory replacement plans that we collect from companies are slightly or considerably slower replenishment. And the proportion of companies in the commerce sector that consider that inventories are low have also increased significantly in the Imce ”.
However, he explained that in the first withdrawal “we had a relatively low proportion of the withdrawal that went to pay for habitual consumption that includes services, which are more intensive in employment. In a second withdrawal, given the profile of beneficiaries, that is, older people, higher income, higher balances in pension funds and who have already made a previous withdrawal, it is expected that the proportion of a second withdrawal that is destined to financial investments and durable consumption will probably be higher, and the proportion destined to non-habitual consumption and services that generate a greater multiplier effect will be lower ”.
Marcel recalled that “the impact of the first withdrawal on financial markets was greatly reduced by the liquidation concentrated in external assets, this impact on a second withdrawal is potentially greater, especially if the expectation of new withdrawals is generated from here on. and if there are shorter implementation deadlines, which is an issue that the Commission has been discussing ”.
Likewise, Marcel said that “a second withdrawal of 10% would put pressure in the short term on the money market, that of bank bonds, and would generate relevant liquidations of foreign assets. The effect on financial prices would depend on the demand for these financial assets, the expectation of new withdrawals, and the margin of action for regulators ”.
More about Withdrawal of funds
Regarding the margin of action, Marcel pointed out that “both as a result of the stimulus programs that the BC has implemented, as well as the measures it took to limit or facilitate the first withdrawal, the composition of the bank’s liabilities has changed so much. , as well as the assets of the BC. On the bank liabilities side, the proportion of debt with the BC has increased, which corresponds to the FCIC. Instead, deposits in mutual funds, or external credits have been reduced ”.
Meanwhile, “on the BC assets side, the proportion of reserve assets has decreased, fundamentally international reserves, and it has increased in loans to banks, and the internal investment portfolio. Now, of course, this has occurred in a context where the bank’s balance sheet of total assets has expanded. It has practically doubled as a proportion of this ”.
Along these lines, he commented that, “until now, an instrument that has been used a lot throughout this process, both to stimulate activity to inject liquidity into the economy, and to absorb the impact of the withdrawal of pension funds, Bank bonds have been, currently the BC already has more than US $ 8,000 million in bank bonds, and that reduces our margin of action, because bank bonds are the debt that banks have.
On this, Marcel argued that “we as BC cannot end up being the main or sole creditor of the bank, we cannot unlimitedly increase our holdings of bank bonds. That is something to keep in mind. Now, apart from this, of course there are other powers that the Bank has (such as) buying Treasury bonds in the secondary market ”.
Marcel reiterated to the senators what is the long-term effect of a reduction in pension savings. “Given that the withdrawal of funds is not an income, but is the liquidation of an asset, the higher consumption that is financed in this way generates negative savings for households, then it reduces private savings,” he said.
In this sense, he pointed out that “if this reduction in private savings is not offset by the increase in savings of some other domestic agent, then there are two alternatives: one is that the external saving is the same, and therefore, the investment. And the other possibility is that the investment is maintained but requires greater external savings. This higher external saving means that the economy becomes more dependent on capital flows; and that the exchange rate, our currency, tends to depreciate in the long term ”.
Marcel also said that there would be fiscal effects and that “there are also potential effects on the risk premium and financing costs, if a measure like this raises doubts about the quality of local institutions, or simply if it is that there are expectations that this is a process that does not have a very clear limit, and therefore, all this process of liquidation of assets and changes that it implies for the financial market, that increases the risk of the local economy, because that The local economy has less capacity to separate itself from what happens with external shocks, which has been one of the strengths we have had in recent years ”.
Marcel said that “a second withdrawal would be more concentrated in affiliates of the richest 20% of the population, given that this segment already made a withdrawal of the same magnitude, and that their propensity to consume habitual consumer goods is lower, the impact on private consumption, internal demand, and the Product, will probably be lower in a second withdrawal ”.
He also referred to taxation: “In addition, this second withdrawal would have a greater component of tax benefits for exemption from income tax for members who belong to the fifth quintile. For all practical purposes, given the coverage of income tax in Chile, all those who pay income tax are in the fifth quintile, that segment benefited from the tax exemption, and probably in a second withdrawal that benefit it is higher because as it is an additional income, it is responsible for applying higher marginal rates, then, being exempt, the tax benefit is greater ”.
Marcel said that “this contrasts with the lower magnitude of withdrawal for the first quintile, by excluding affiliates who were left with a zero balance. So, in practice, if we want to compare these two things, the accumulated tax benefit for the richest 20%, between the first and second withdrawals, would be much higher than the entire second withdrawal of the poorest 20% ”.
In this way, he added that “if one combines the effect of this second withdrawal, which tends to be more concentrated in the highest income quintiles, which already had the previous maximum withdrawal, it combines it with an additional pressure on inflation, the effectiveness or the impact on the activity of the second withdrawal would be between a quarter and a third less than that of the first withdrawal.
