Peru: pension funds withdrawal to be approved on Thursday

PERU - In Brief 09 Apr 2024 by Alfredo Thorne
As expected, today Congress scheduled the vote on the pension funds withdrawal bill at its Thursday congressional plenary. The bill calls for pension funds’ contributors to be able to withdraw up to four Unidades Impositivas Tributarias (UITs, or tax-inflation-indexed units). This would allow each worker to withdraw up to PEN20,600 (about US$5,567). According to our estimates, pension funds could experience a PEN30bil (about US$8.1bil or 3.7% of GDP) reduction in funds out of a total of PEN125bil. With the economy having been in recession and the labor market remaining soft, this is proving a popular bill, and Congress would most likely vote in favor of it. The impact on the economy is less clear. For once, Banco Central de Reserva del Peru (BCRP, the central bank) would provide hedging instruments for pension funds to absorb the shock. According to the time schedule of the withdrawal provided in the draft bill, pension funds would take between four and six months to finance the entire withdrawal. The BCRP would most likely provide a repo facility for pension funds to abstain from selling their government debt positions (although the market has already front-run this option). Also, if pension funds need to sell dollar positions, the BCRP would provide a facility to buy the USD and limit its impact on the USD/PEN spot market. In terms of what workers would do with this excess cash, to the extent that most are high-income workers, our expectation is that most would be deposited in the financial system or used to pay down past debts. Some may opt for USD cash or USD accounts, however with the PEN remaining strong, this may prove marginal. The impact on domestic expenditur...

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