By Nelson Bocanegra
BOGOTA (Reuters) - Colombia's financial market cringed last week when it learned the government was planning to order pension funds to transfer some $7.34 billion worth of contributions to the public retirement fund.
The measure would have allowed 350,000 people with fewer than 10 years before retirement to move funds to the public pension fund, Colpensiones. It immediately sparked speculation the money would be used for some of the $11.7 billion in pension costs the government faces this year, allowing it to redirect other funds toward coronavirus needs.
Although the measure was later ruled out by the government, a proposed law working its way through congress has kept market worries high.
The law would also allow those with private pensions to voluntarily move to the public fund. The provision is meant to correct legal complaints that savers were not given sufficient advice when they joined private funds two decades ago.
A significant movement out of private pensions would have ripple effects in public bonds, as pension funds are major buyers, and in the stock market, where funds invest a large part of the $71.6 billion they control.
"We ended up in the same place by a different route," said Munir Jalil, BTG Pactual's chief economist for the Andean region. "What it shows is the level of cash flow need... for the national government, which makes them consider these ways of getting funds."
The country's economy, usually one of the region's heartiest, looks set to contract 5.5% this year because of a months-long coronavirus quarantine and lower oil prices.
"These proposals don't help at all because we'd have to calculate how much money would leave private funds," said Daniel Velandia, Credicorp (NYSE:BAP) Capital's chief Colombian economist. "They would have to sell their positions or transfer debt titles to the government; it isn't at all a positive impact."
The policy has echoes of Argentina in 2008, analysts said, when private pensions were nationalized to make $24 billion available to the government.
Bogota's "fortunate reversal" kept Colombia off Argentina's "disastrous path," former Finance Minister Juan Camilo Restrepo said on Twitter.
The government was considering allowing partial withdrawals from pension funds, Finance Minister Alberto Carrasquilla said on Wednesday. A day later, President Ivan Duque rejected the idea.
"This shows the deficiencies of the system and makes the need for a structural pension reform even more urgent," said Mauricio Olivera, director at the Econometria consultancy. "If everyone moves to Colpensiones, it could create a pension time bomb because the subsidies are really high."