Covid-19 Could Reduce the Number of Afores in Mexico
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Covid-19 Could Reduce the Number of Afores in Mexico

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Gabriela Mastache By Gabriela Mastache | Senior Journalist and Industry Analyst - Fri, 06/05/2020 - 10:43

According to a note by El Economista, the current economic crisis the country is experiencing could impact negatively Afores, not only with losses in their investments but also by killing many of them off, which would lead to less competition.

According to experts, the Mexican Afore system is composed by different players of different sizes. The larger ones are better prepared to face external shocks, while those that are smaller could face difficulties, especially considering Afores are scale businesses, meaning that they require more clients to reduce costs.

For Carlos López Jones, Director in Economic and Financial Trends Consulting of Tendencias, said in a note by El Economista that 12 years ago, when the financial crisis hit, banks, insurance companies and brokerage houses decided to sell their Afores because they were not profitable. According to López, it remains to be seen if Afores belonging to certain banks like Banco Azteca, BanCoppel, Citibanamex, Inbursa and Banorte will survive. The disappearance of Afores would lead to less competition and higher fees.

Though the current Afore system dates to 1997, the number of Afores has reduced in the past years. In 2007, there were 21 Afores. However, in 2020 only 10 Afores are still operating. Moreover, a reduction in the number of Afores would also lead to a reduction in their participation in investment projects. Bernardo González, President of AMAFORE, said to MBN that Afores are an important investor in the Mexican infrastructure sector. “One of every four pesos spent on infrastructure in Mexico comes from Afores. This means that we are a significant institutional investor in the infrastructure sector.”

Another factor that could weaken investment is the withdrawals users are making from Afores. There is a current prevision that allows workers to withdraw money from their Afores in case of unemployment. However, experts do not believe this represents a solution. In a note by El Economista, Alejandra Macías, from the Center of Economic Budgetary Research (CIEP), said that while the need of having liquidity is understood, withdrawing money from Afores would only lead to a weaker pension and a weaker system. Moreover, Macías mentioned that Afores should not be used as an unemployment insurance.

A proposal by the governing party MORENA has made waves recently, as it seeks to allow workers to make withdrawals of over MX$13,000 (US$604). However, experts believe that these proposals would only hurt workers and the overall system. “Mexico changed its pension scheme in 1997, but the change was not ideal because the savings parameters did not take into account the reality of the country,” says González. “It has taken us more than 22 years to incorporate a solid system that works. The problem is that if we do not adjust these parameters, there will be social unrest among workers.”

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