Peru pension fund changes seen as threat to infra investment

Peru's private pension funds may be unable to invest in infrastructure projects in the future if the next government doesn't carry out necessary reforms, the country's largest fund manager said.

Pension funds, known as AFPs and which manage a total 128bn soles (US$38bn) in assets, may face a liquidity squeeze due to recent changes in legislation, said Aldo Ferrini, who manages US$15bn at Grupo Sura's AFP Integra.

Congress last month approved a controversial law allowing AFP contributors to withdraw up to 95.5% of their accumulated pension savings when reaching the retirement age of 65.

"Much of this money will go into fixed-term deposits or towards consumer spending, and this will take away the capacity to invest in the country's infrastructure," Ferrini said at a press conference in Lima. "Infrastructure projects are ideal for AFPs and are a growth engine for the country."

Lack of investment in the industry by AFPs, the country's largest institutional investors, means concessionaires will have a hard time selling long-term bonds to finance their projects, Grupo Sura's Peruvian CEO Jorge Ramos said.

"Banks can't lend money for that amount of time," Ramos said. "This will have a tremendous impact on long-term investment in infrastructure."

The four AFPs operating in Peru – Integra, Prima, Profuturo and Habitat – have invested a total US$1bn in privately held infrastructure consortiums' stocks and bonds to diversify their portfolios away from Lima's volatile stock exchange. Last year, engineering firms Cosapi, Graña y Montero, its Norvial highway concessionaire and the operators of line No. 2 of the Lima metro all launched debt offerings.

DIFFICULT DECISIONS

Peru's government, which will change hands in two months, will have to take "politically difficult" decisions such as labor flexibility, honing productivity and eliminating bureaucratic obstacles to investment projects, said Roberto Melzi, CIO of Sura Investment Management.

"Will the next government take these decisions? I have serious doubts," Melzi said.

At the same time, a ballooning fiscal deficit leaves the finance ministry little leeway to increase public spending on infrastructure, he said. The fiscal deficit is expected to swell to 2.6% of GDP this year compared with a 1% surplus in 2013 as tax revenues and export earnings dwindle.

Presidential candidates Keiko Fujimori and Pedro-Pablo Kuczynski, who will head to an election run-off on June 5, have both pledged to increase public spending and speed up permitting processes for infrastructure and mining projects.

President Ollanta Humala, whose mandate ends July 28, has awarded a record US$20bn in public-private partnership infrastructure concessions since 2011. However, projects such as metro line 2, the southern Peruvian natural gas pipeline and the expansion of Lima's Jorge Chávez airport, have been held up by bureaucracy.