The Retirement funds in Mexico: Should they invest in government infrastructure?

Las Afores ¿Es buena idea que inviertan en proyectos de infraestructura del gobierno

By: Ximena Peinado and Marina Fonseca 

The Retirement Fund Administrators in Mexico (Afores by its acronym in Spanish) are the private financial institutions in Mexico that manage retirement funds for workers.

These same, invest the money not only in fixed and variable income to grow their money but also in alternative assets to a lesser extent, since their profitability is riskier.

The historical performance of the Afores system from 1997 to 2020 was 10.87 per cent nominal per year and 5.08 per cent real annually.

The Afores invest in government sovereign bonds because of their effectiveness; however, with the COVID-19 pandemic, the sovereign rating of our country has worsened, and with it, the confidence that private financial institutions have in investing in it.

Retirement funds in Mexico: Afores investment

It must be taken into account that the Fitch Ratings and Moody’s rating agencies downgraded Mexico: Fitch Ratings from BBB to BBB- and Moody’s from A3 to BBA as a result of the deterioration of Pemex’s medium-term growth expectations, the framework of public policies, institutional capacity and the business climate in the different sectors.

This is how SIEFORES (the investment companies of the Afores) have chosen to invest their assets abroad. From July 2019 to July 2020, foreign variable income increased from 11.9 per cent to 17.1 per cent of total managed resources.

Given this, the government and the Mexican Association of Retirement Savings Fund Administrators (Amafore by its acronym in Spanish, which concentrates more than 3.9 trillion pesos) proposed an emerging investment scheme to lessen the economic impact caused by the COVID-19 pandemic in the country.

Reduction of the economic impact before COVID-19

Invest the money from the pension funds in infrastructure projects of the federal government that are already operating and generating fixed income.

This, with the goal of stopping the investment abroad, which could have a negative impact on the Mexican economy and thus, collaborate on projects that are already in operation and that also already have income.

This is how the debate has started on whether this will be a good or bad idea, which will depend a lot on the infrastructure projects in which they will invest. We asked Marina Fonseca about this.

For this, we ask Marina Fonseca, who works with Luis Doporto Alejandre at PR1ME Capital, an economist who graduated from the University of the Basque Country (UPV) with a master’s degree in International Business Management from the Distance University of Madrid.

Marina Fonseca

The proposal to invest the money in infrastructure projects that are operating has begun to become more relevant since in the last year, especially in recent months, the investments of the Afores increased in foreign rent variable up to 17%.

This is due to two major factors: yields in foreign markets and exposure to the exchange rate. The economic impact caused by Covid-19 has been reflected in all economies, especially in the value of financial assets, unevenly affecting countries’ expectations of economic recovery. Therefore, together with the depreciation that the peso has accumulated in recent months and the decrease in the country-risk rating, it has caused an outflow of foreign capital.

This capital outflow has impacted the national economy and large infrastructure projects. This is where the debate begins: should the Afores invest the money in infrastructure projects? 

If this is the path they choose to take, it is very important for them to assure themselves of the value of the projects in which they seek to invest.

They need to know if they are well evaluated at all times by making the corresponding evaluations and knowing the viability of the project, through processes such as Due Diligence; since a careful analysis must be carried out in order to make the right decision.

Finally, the profitability of the projects will determine the attractiveness of investing in international markets or in the national market.

That is why Afores currently invest a higher percentage in variable income than when they started (at the beginning they were designed for fixed income projects) and this means that they have to ensure better returns since otherwise this can affect the worker’s pensions.

In conclusion, the Afores must ensure at all times to have the highest profitability, focusing on the most attractive projects and markets, achieving the highest returns on their resources.

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