Mexico's Pension Funds Positioned for Explosive Growth
Chen, I-Chun, Global Finance
Growth of the private pension system, or Afore, market in Mexico has been robust since it was launched in 1997 and will likely pick up even greater momentum over the next few years as the new government tries to reform the system. According to figures from the National Retirement Savings System Commission, or Consar, the government-run pension regulatory agency, a total of 17 million workers were signed up with an Afore at the end of August 2000, with total funds reaching more than 240 billion pesos ($25 billion). Eduardo Silva, president of Amafore, the country's Afore association, and general director of Afore Profuturo GNP, estimates More assets accounted for about 3% of Mexico's gross domestic product in 2000.That proportion will likely grow by one percentage point a year, he says.
The growth of the Afores business is already outpacing the deposit rate of banks, says Jorge Colin, investor relations officer at Banorte in Monterrey. "We know it will become the second largest banking business in Mexico in the long term," says Colin. "Currently, assets under management [by Afores] are about 10% of total deposits in Mexico. In five years, it could represent 16% to 17% of total deposits."
However, much of the future growth in the Afores market depends on whether there will be an expansion in investment instruments. Right now investments are limited to government debt. Industry insiders say current talks with Consar will likely yield an announcement in the first half of 2001 permitting pension investments in capital markets. Not only will that pique consumer interest, but also the subsequent additional volume to the Mexican Stock Exchange would be a much-needed shot in the arm. Other possible investment areas include mortgagebacked securities, corporate bonds, and infrastructure bonds.
That would be good news for banks as well. "It would help balance our position for long-term financing," says Colin. Stiff, he cautions, it may take two to three years to create enough investment volume to get funds fully set up in the capital markets.
Another area that could light a fuse for explosive growth in the Afores market is a possible integration of public sector pensions. The pension system for the country's six million public sector workers is woefully under-funded and virtually bankrupt, says Ernesto O'Farrill, president of the economic analysis house Bursts metrica in Mexico City. …