Chile’s powerful pension fund administrators (known as AFPs) are the lifeblood of the country’s financial system. With assets worth CLP164 trillion (US$210 billion) at the end of July (equivalent to roughly 75% of gross domestic product), no one stands taller. Last year, AFPs owned almost 7% of the shares on the Santiago Stock Exchange and two-thirds of government bonds.

That visibility also leaves them politically prone, especially as Chile’s pensions system has yet to deliver Chileans with the comfortable retirements promised since privatization four decades ago.

Almost two million people have been thrown out of work since the COVID-19 outbreak began. They are reliant on unemployment insurance, meager government handouts and soup kitchens to survive. This pushed opposition lawmakers to propose an allowance for savers to draw down their pensions savings to mitigate the impact of the downturn.

The plan was opposed by the center-right government of Sebastian Piñera, who warned , along with outside experts, about its impact on future pensions, already low payouts, and its regressive nature (those with most have most to gain). However, overwhelming public support for the bill led many government supporters to join forces with the opposition to achieve the necessary two-thirds majority and pass the relief measure.

Under the legislation, those with savings worth more than CLP10 million (US$12,900) can withdraw 10% of their account value, up to a maximum of CLP4.3 mln (US$5,562). Those with less can withdraw up to CLP1 mln (US$1,292). Demand has been overwhelming as nearly 9.6 mln savers, or 87% of the total, applied to withdraw cash and almost US$15.1 bln was paid out to savers in just over six weeks.

The move in late July had a debilitating impact on Chile’s corporate debt markets. It has already suffered the choppy trade, stop-start pattern, since last October’s violent social unrest, preventing 2019 from becoming a record year for new issuances.

Markets were up and running again by February only to be hit by the global shockwaves triggered by the rapid global spread of COVID-19 in March and April. Unprecedented intervention by authorities triggered another flurry of issuances mid-year (Chileans banks issued US$2.0 bln worth of bonds in July alone backed by the Central Bank’s asset-buying and lending programs) before the pension debate struck.

Although many companies have slashed investment plans in the face of the slump in activity (Chilean GDP is set to fall 5% this year), demand for credit remains strong to provide badly-needed working capital and refinance debt.

Corporate lending by banks rose 18% in the year to July as companies drew down credit lines to stay afloat.

Although the rise in risk premiums means that credit is more expensive than a year ago, many companies have little choice but to tap the market, said Pablo Zamorano, head of corporate finance at BICE Inversiones in Santiago.

And with trading conditions highly uncertain, many companies preferred more expensive direct placements, rather than traditional Dutch auctions to ensure they could raise the capital they need.

“They are prioritizing access over costs,” he said.

Parque Arauco SA issued bonds worth 7 mln Unidad de Fomento (UF) (US$260 mln) in April and June this year after the pandemic closed most of its malls in Chile, Colombia and Peru, slashing second quarter revenues by almost 75%.

“The aim was to leave us in a much more solid financial position given the highly uncertain situation…of unknown duration,” explained CFO Claudio Chamorro.

UF is a unit of account used in Chile.

However, this flurry of issuances was cut short by the start of the pensions debate in July.

The turmoil that many experts warned that the withdrawals would bring to financial markets has not occurred. Although the Santiago’s IPSA index fell 4% in July on fears of massive share sales by AFPs, share prices rose again in August.

Helped by a special central bank asset buying program and a relaxation of investment rules, AFPs covered the withdrawals by selling bank bonds and deposits and with saver contributions, minimized the stress to markets. On September 24, the central bank suspended some measures it adopted to stem the impact of the new policy.

But with the start of the debate, the AFPs withdrew, almost completely, from new issuances as they focused on attending to clients. Many corporates have so far opted to delay until the waters calm down.

The few that went ahead adjusted issuances to match market conditions. Knowing that the AFPs were largely absent, shipping firm Grupo Empresas Navieras issued bonds worth UF1.5 mln (US$55.7 mln) on August 12th with an eight-year term. Mutual funds acquired around a third of the issue

“Although the 3.49% was more expensive, it was within our target range,” CFO Roberto Manubens told LatinFinance.

Similarly, rival shippers SAAM issued a UF1.2 mln (U$44.6 mln) bond.

With the bulk of the pension withdrawals now complete, debt markets are now returning to normal although issuers are prepared for more turbulence.

In October, Chileans vote in the delayed constitutional referendum, aimed at answering the call for change from the streets. Next year sees the first-ever gubernatorial elections, elections to the new constitutional convention, and the country’s least certain presidential election since the return to democracy. Debate on the contents of the new constitution are expected to take at least two years with another referendum at the end of that period. Many fear a return of last year’s street violence.

“The market is very risk sensitive and very dynamic so companies must be alert to take the best decisions at the right moment,” explained Parque Arauco’s Chamorro.

Meanwhile, the withdrawals have sharpened the debate over the country’s pensions system.

Following his defeat over the move, President Piñera has promised to advance his proposal to boost future pensions by increasing employer contributions, part of which would be used to top up the accounts of the lowest paid.

As job losses continue to pile up, some lawmakers are already pushing for further pensions withdrawals, although the proposal lacks widespread support a second time around.

Some radicals would like to go further and abolish the AFPs completely, possibly through nationalization. However, that prospect has dimmed in the wake of withdrawals which has highlighted to many Chileans the advantages of saving for the future. Polls suggest that almost 90% of Chileans now consider that the funds in their pension account belong to them, up from barely half a few weeks earlier. That could bode well for the continued role of Chile’s pensions funds in the country’s financial sector.