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Mexican Government Proposes Changes to AFORES’s Investment Regime

29 January 2019

The proposed changes will allow AFORES to investment in unlisted vehicles including private equity.

(Bloomberg) Andres Manuel Lopez Obrador’s plan to let Mexico’s giant pension funds invest in more diverse assets, including private equity funds, is sparking concern that the populist president will steer the funds toward his own pet infrastructure projects.

“The worry is that this could be a way to finance projects of interest of the government, for which it lacks fiscal funds, but that are economically controversial,” said Gustavo Rangel, the chief Latin America economist at ING Financial Markets LLC in New York.

The plan, submitted to Congress last week, is among a raft of measures floated by the government this month to deepen Mexico’s lackluster capital markets — including a proposal to slash taxes on profits from initial public offerings to encourage more companies to go public. The administration is eager to lure more investment and build on a market rally since Lopez Obrador took office at the beginning of December.

The proposal would loosen regulation of funds known as Afores, whose $249 billion under management is equivalent to 90 percent of the market capitalization of Mexico’s benchmark stock index. While the change would probably spur inflows, critics say it could also help fund alternative investments such as Fibras, the REIT-like structures that can be used to back government building projects. It would also allow investments in unlisted vehicles including private equity.

Yet the Afores have been down this road before — ironically, with that very airport project. Born under the aegis of former President Enrique Pena Nieto, it was paid for partly by a special instrument called a Fibra E, whose investors included four pension funds including those run by Grupo Financiero Inbursa SAB and Grupo Financiero Banorte. It’s still unclear how exactly they’ll get that money back.

And investors are wary about whether Lopez Obrador intents to proceed with other projects he has pushed personally, including a Mayan train for tourists and an $8 billion oil refinery in his home state of Tabasco. While neither project has officially begun, investors worry that funding for the projects will put pressure on the budget.

The Afores plan is light on details. It says rules should “evolve in a timely manner” — vague language that has gotten the attention of investors. Jesus Ramirez, a finance ministry spokesman, decllined to comment on the proposal.

“This is significant in that the Afores will be able to expand their range of investments,” said Luis Gonzali, a Mexico City-based money manager at Franklin Templeton. “However, it could lend itself to coercive practices by the authorities to fund government projects. That won’t necessarily happen, but we’ll have to watch carefully as the new regulations are implemented.”

That’s not to say that workers who pay into the pensions are being neglected. One provision of the proposal removes a mandated investment period for voluntary contributions before withdrawal, providing them with faster access to the investments. In addition, the proposal would let Afores invest in private placements, while maintaining a restriction against investing in IPOs.

Further diversification of Afores is all for the best, said Exotix strategist Rafael Elias, yet for Lopez Obrador’s ambitious new administration, money concerns will only grow and so too will the temptation will grow to raid pension funds.

“I don’t think that’s going to happen this year,” Elias said from New York. “Next year, I don’t know.”