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Bolivia: Capitalization, Pension Reform and their impact on Capital Markets

Explore the impact of pension reform and capitalization programs on Bolivia's economy, including challenges faced, financial results, and the evolution of capital markets post-reforms.

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Bolivia: Capitalization, Pension Reform and their impact on Capital Markets

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  1. Bolivia: Capitalization, Pension Reform and their impact on Capital Markets By Pablo Gottret, Ph.D. 13th Plenary Session of the OECD Paris, France September, 1999

  2. Bolivia: General information • Population (1997): 7,8 millions • 7.09 inhab/km2 • 61% urban • 39% rural • Net income per capita: $ 1078

  3. The economy during 1985-1993 • Annualized inflation rate: 25,000% (august/85) • GDP growth: - 1.68% (1985) • Negative Int’l Reserves • Causes • Fiscal deficit of more than 20% GDP • Protected and deficient industry/low foreign investment • Fixed and overvalued exchange rate • Subsidized interest rates/bankrupt financial system. • High external debt and moratoria of payments

  4. The economy during 1985-1993 • Reforms adopted • Liberalization of prices • Liberalization and unification of capital flows • Liberalization of labor markets • Simplification of tax regime • Closure of deficitary public companies • Results • Decline of inflation rates to 8% (1994) • Positive GDP growth by 4% (1990-1994) • Price stability • However, private investment was only 7.08% of GDP (1993)

  5. Challenges in 1994 • Key companies continued under Government administration • Utilities required large amounts of investment • Most public investment directed to productive and infrastructure sectors (24% and 48%) in lieu of social sectors • Most private investment financed out of pocket and with development credits channeled through the Central Bank

  6. Challenges in 1994 • Low long term internal savings applied to pay retirement pensions • Non existent capital market development • Weak pay as you go pension system • Underdeveloped insurance industry

  7. Capitalization Program • A strategic partner takes over 50% of public Co. and administrative control. • 100% of partner´s cash contributions, representing 50% of the investor´s best market value estimate, is committed for new Co. projects. • The remaining 50% of the shares is transferred to a fiduciary fund managed by private pension administrators • The benefits of the latter are distributed among the adult Bolivian citizens through a fund known as FCC (Collective Capitalization Fund)

  8. Capitalization Program Features of the program: • Modern sectoral laws and regulations • Exclusivity periods • Introduction of supervisory bodies. • Contracts define specific investment plans • The FCC is valued in US$ 1.7 bn. at capitalization prices

  9. Capitalization financial results (millions of US$) • ENTEL (telecommunications): $ 610 (EuroTelecom/Stet Int´l) • YPFB (hydrocarbons): $ 833 (3 Co., Amoco/PerezCompanc; YPF; Enron/Shell) • ENDE (Electricity): $ 138 (3 Co., Dominion Energy; Constellation energy; Energy Initiatives) • ENFE (railroads): $ 48 (2 Co., Cruz Blanca) • LAB (airline): $ 47 (VASP)

  10. Pensions Reform General Situation of the pay as you go system in 1995: • Administration: divided in Basic (public) and Complementary (semipublic) • Covered population: 315.000 affiliates (22% of urban labor force) and 115.000 pensioners • Disclosed mean salary: $ 200/month Financial situation: the system was bankrupt, needed transfers regularly from the Treasury Causes • Active/passive ratio: 3/1 • Hyperinflation in the mid ‘80s • High administrative costs (17% of total contributions) • High evasion rates and private sector debts

  11. Pensions Reform Design First pillar: consists of the benefits for every Bolivian adult citizen financed by the fund derived from capitalization process Second pillar: is based on a mandatory contribution from the employees salary to an individual capitalization account, which is privately managed. Contributions: 14% (Incl. 4% premia for common risk & workers compensation)

  12. Pensions Reform • Benefits • No fixed retirement age. Retirement allowed once the individual account is actuarially enough to cover a for life pension of at least 70% of the reference salary • There is no minimum pension guaranteed by the State. Management • 2 private fund managers (AFP), appointed in international bid. Contract grants them exclusivity for a 5 year period. • Affiliates were preassigned to an AFP.

  13. Pensions Reform • Compensatory Pensions • These compensations will be paid monthly upon retirement. Current retirees • Their pensions are entirely funded by the Treasury. Financing of the fiscal cost • The pay as you go system was completely closed • The fiscal cost in 1999 will be $300 millions (more than 3.2% of the GDP • Government will borrow from the new system ca. 140 million.

  14. Capital Markets • Prior to reforms, capital market was shallow, low volumes of trading (mainly short term debt instruments) • However, post reforms, the structure of the capital market hasn’t changed significantly. Reforms had little impact in the capital market due to: • Govt. crowds out most funds collected by pension system • Capital market’s law recently passed (March,1998) • Capitalized companies not listed in the Bolivian Stock Exchange • FCC expected to bring new dynamism to trade equity once the capitalized companies are listed.

  15. Results (Capitalization) • The administration of capitalized Co. was transferred from public to private sector • Clear rules and regulations were established • The public sector activity is limited to regulation • Capitalized Co. are complying with investment commitments • Additional foreign invest (hydrocarbons and mining) • Change of structure of investment: 1998 Private investment : 14.2% of GDP, public investment 6.3% of GDP vs. 1993: 7.1% and 9.8%

  16. Results (Capitalization) • Change of Public investment composition - 1993 social sector investment: 19.2% of total public investment vs. 48% in 1998 • In 1993 most private investment were carried out through developed credits channeled by the Central Bank vs. 1995-1998 were most private investments were channeled by capitalized companies • Capital Market will soon list the capitalized companies and will receive long term resources from FCC

  17. Results (Pensions) • 1995 covered pop. 300,000 vs. 400,000 in 1998 • 1995 contributions inflow: $105 mm. vs. 1998: $180 mm. • 1998 rate of return of funds: 8.7% in real terms • Long term resources expected to be provided by AFPs • Capitalization resources not used to finance fiscal pension cost. Such cost is financed by Treasury by borrowing funds from the new system • Contributors to former system were obligatorily transferred to the new. Treasury pays compensatory pensions to these people

  18. Concluding Remarks Required preconditions for a capitalization process: • Stable macroeconomic and legal framework • Independent regulatory authorities • Exclusivity periods may be required • Fiduciary players must have international recognition and correct incentives.

  19. Concluding Remarks • Capitalization is a good marketing tool that puts the country in the international scene • Capitalization does not bring cash to the Treasury. Therefore, when carried out jointly with a pension reform, the Treasury must be able to cope with the cost of the reform. • These reforms don’t necessarily immediately strengthen the capital markets

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