Chile’s pension bill: the economic & market impact - Capital Economics
Latin America Economics

Chile’s pension bill: the economic & market impact

Latin America Economics Update
Written by Quinn Markwith

Reforms in Chile that allow households to withdraw some of their pension savings may help to boost the economic recovery over the next year. But the way in which the reform was passed adds to the sense that public pressure will result in a higher social welfare bill and looser fiscal policy over the medium term.

  • Reforms in Chile that allow households to withdraw some of their pension savings may help to boost the economic recovery over the next year. But the way in which the reform was passed adds to the sense that public pressure will result in a higher social welfare bill and looser fiscal policy over the medium term.
  • The bill passed late last week will allow citizens to withdraw up to 10% of their pension savings over the next year, free of tax, up to a limit of four million pesos. There seems to be widespread interest in taking advantage of this. According to a Chamber of Commerce survey, 80% of lower-income citizens plan to withdraw the full 10% of their funds, as do 60% of the highest income earners.
  • While it’s difficult to put numbers on the potential withdrawals, the superintendent of the pension system estimated that a maximum of US$20bn (8% of GDP) of funds could be withdrawn. Based on the likely withdrawals from the Chamber of Commerce survey, a plausible figure is US$14bn (5.5% of GDP).
  • In the near term, the withdrawals are likely to boost economic activity. Extra funds will probably be used to shore up consumption over the coming months. This presents an upside risk to our already above-consensus GDP forecast. (For more, see our Latin America Outlook published last week.)
  • However, the bill does seem to have resulted in a premium on local currency sovereign debt. Chart 1 plots the 10-year Chilean local currency yield and a simple model, which is a weighted average of yields of other EMs’ sovereign bonds. It suggests that the original passage of the bill in the Chamber of Deputies led to a 50bp premium on Chilean bonds. This premium has since declined but is still around 15bp.
  • More fundamentally, the bill adds to the evidence that Chile is entering an era of structurally looser fiscal policy. Popular support for greater welfare spending ultimately forced the government into a U-turn to pass the pension reform bill, similar to when policymakers ceded to calls for higher public spending after last year’s protests. This trend suggests politicians will eventually succumb to widespread calls for overhauling Chile’s predominantly private pension system, leading to higher public spending over the medium term.
  • As it happens, the budget deficit is likely to narrow in the coming years as coronavirus related spending unwinds and tax revenues rebound. But it is unlikely to get back to pre-virus levels anytime soon. We estimate that Chile’s public debt to GDP ratio will climb to around 50% by 2025. (See Chart 2.)
  • Given the Covid-related surge in public debt globally, Chile’s trajectory may not be too alarming. But all else equal, it does suggest that, having historically enjoyed some of the lowest borrowing costs among EMs, there will be an added risk premium on Chilean debt. Based on the experiences of EMs where public debt ratios rose by roughly similar amounts over a five-year period, Chile’s deteriorating public finances could add around 50-100bp to Chile’s country risk premium. (For more on this see here.)

Chart 1: 10-Year Local Curr. Sov. Bond Yield (%)

Chart 2: General Govt. Debt (% GDP)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Quinn Markwith, Latin America Economist, quinn.markwith@capitaleconomics.com