Pension funds: A future anchor for Latam markets?

BOGOTA/NEW YORK (Reuters) - Private pension funds in Latin America, flush with cash while capital markets are constrained by the global credit crisis, may be increasingly used by countries to stabilize their financial systems.

The future of Latin American private retirement accounts, worth about $450 billion, was put in doubt last month after Argentina said it would nationalize its private pension scheme, which has about $25 bln in assets.

Argentine stocks and bonds were pummeled as critics accused President Cristina Fernandez of trying to raid the funds to meet a steep government debt bill next year.

But countries with more market-friendly policies, such as Mexico, Brazil, Chile, Colombia and Peru, are taking much different approaches to using the funds to anchor markets.

Born largely out of the enthusiasm for privatization and deregulation in the 1990s, the rapid growth of the private funds deepened local capital markets, easing reliance on foreign capital.

Now that a global credit crunch has dried up overseas capital sources, Latin American governments and corporations will probably accelerate the trend toward selling their bonds to the thriving pension funds in their own backyards.

"The fundamental situation in Latin America, with its relatively high level of foreign reserves, is better than in the international markets," said Walter Molano, head of research at Connecticut-based BCP Securities.

"So governments and corporations in the region might not have to worry so much that the capital markets are shutting down across the world," he added. "The enormous cushion that exists in the local pension systems can become an important asset for them."

In Argentina, critics say the government wants to get its hands on the $4 billion in annual contributions to the funds to help meet $20 billion in 2009 debt payments, and also to bolster state coffers ahead of mid-term elections next year.

Credit rating agency, Standard & Poor's, on Friday lowered Argentina's foreign currency rating deeper into junk bond territory, citing "heightened concerns about the deteriorating economic and political environment."

BRAZIL, MEXICO

Brazil's private pension system is the region's biggest with total assets in July of $216 billion. There is no sign that Brazil will consider deploying private pension money to help reverse the real's 20 percent fall against the U.S. dollar this year, or the 46 percent fall in the Bovespa stock index over the last 10 months.

Mexico's pension regulator last week announced plans to endow the funds with greater discretion in taking risk.

The move helped Mexico's $67 billion worth of private pension funds to limit the plunge in the country's local bonds, and helped the battered peso recover.

The aim was to provide greater flexibility so the funds can more easily reorganize portfolios amid "extreme financial volatility," pension fund regulator Consar spokeswoman Vanessa Rubio said.

COLOMBIA, CHILE, PERU

In Colombia, private pension funds, which hold $23 billion in assets, are fairly stable and they should be able to help local bond markets get through the global financial crisis.

The benchmark Colombian stock index has lost 37 percent of its value in 2008 and its peso has slumped 13 percent over the past month.

"Pension funds will be crucial over the next few weeks as global markets try to regain their bearings," said Camilo Perez, chief economist at Banco de Bogota.

"These funds will be the first ones to start buying debt, and they will take the long positions that other investors are afraid of right now," he said.

Last week Chilean Finance Minister Andres Velasco said the country has no plans to nationalize its private pension system. Chile was the first country in Latin America to launch private pension funds which are now worth about $98 billion.

Meanwhile Peru's congressional leader, Javier Velasquez, has introduced a bill that would ban the government from taking over the $15 billion in pension funds to cover fiscal deficits. The proposed law would impose criminal penalties on government officials involved in any takeover of pensions.

"We need to prevent governments from succumbing to the temptation, either now or in the future, of dipping their hands into pension funds to cover fiscal gaps," Velasquez said.

Venezuela, has no private pension funds, but in Bolivia the privately administered pension system is seen under threat as President Evo Morales widens his drive to nationalize broad swathes of the economy.

Morales wants to create a public pensions system that would control the $3.5 bln funds managed by Zurich Financial Services and BBVA Prevision since the mid-1990s.

(Additional reporting by Fiona Ortiz in Buenos Aires, Noel Randewich in Mexico City, Nelson Bocanegra in Bogota, Terry Wade in Lima, Simon Gardner in Santiago, Ana Isabel Martinez in Caracas, Eduardo Garcia in Bogota and Patricia Avila in Montevideo).