There are currently several proposals on the table of varying size (i.e. 1 UIT, 2 UITs, 3 UITS, 4 UITS, 70% of Fund), adding some uncertainty into the process. Last week, Cesar Revilla Villanueva of Fuerza Popular presented an initiative for AFP withdrawal of up to S/9,900 (2 UITs, about USD2,650) for people who are unemployed for 6-12 months. The proposals are being evaluated this week by the Economy Commission, who will decide which version of the bill to push to Congress. Some legislators are aiming to start the process of debate in the Plenary Session of Congress as early as Thursday 30 November. However, it could take more time and get pushed into early December.
Although a general 4 UIT withdrawal seems devastating for the current AFP system and could appear to potentially hurt local assets in the medium term and provide longer term risks for fiscal outlays, the potential and critical technical detailing to target just the unemployed affiliates and just 2 UITs would reduce the overall structural impact from the bill. Keeping local markets mostly shielded, as well as future pensions, and medium to longer-term fiscals. Still, we prefer to play local markets on the more cautious side, expecting an overreaction to headlines and for other reasons stated below:
FX: Anticipation of repatriation flows as a result of withdrawals are likely to support PEN in the short term, however, we expect this move to fade. Especially if there are technical limitations to the withdrawals. The reduction of the real policy rate by 20bp to 3.67% as well as future real rate cuts will likely keep weakening pressure on the PEN and we maintain our long USDPEN bias. USDPEN has seen strong support at its 200DMA of 3.73; we look to levels at or below 3.73 as attractive to add long USD vs. PEN exposure.
Local Rates: We continue to prefer short-tenors in the Soberano curve, playing the normalisation of term structure throughout the cutting cycle, especially as the outright spread to US Treasuries remains at or below the historic median, providing less protection to external risks and/or domestic political risks. We expect headline noise around AFP withdrawals to further amplify curve steepening. We would fade a large rate sell-off if a 2 UIT for just 6m-12m unemployed affiliates is pushed to congress.