In any economy, the financial system plays a key role that benefits us, whether we are spending more or less than we own. This system channels the savings of people and businesses that do not use them, allowing them to be used efficiently by those who need money, but do not currently have it, in exchange for a rate of return. A vital part of this system is the capital market, where financial instruments such as stocks and bonds are traded.

This efficient channeling of savings has positive impacts on the economy. There is evidence that a sound capital market encourages investment, reduces financing costs for companies, generates employment and contributes to economic growth. It also strengthens a country's resilience to uncertainty and external pressures, maintaining lower volatility in the exchange rate and local interest rates.

The reality of the capital market in Chile is positive, largely thanks to the country's pension funds. However, in 2020, with the advent of COVID-19 and quarantines, people's incomes declined, leading to legislative proposals to allow people to withdraw part of their pension funds and mitigate the loss of income. The approval of three of these bills injected liquidity equivalent to 18% of GDP (USD 50 billion) and affected the depth of the capital market. affected the depth of the capital market, reducing its share from approximately 85% of Chilean GDP to 56%.

These withdrawals had several effects: a current account deficit that depreciated the exchange rate and increased inflation. In addition, they negatively affected the capital market, complicating access to financing for individuals and companies, In addition, they had a negative impact on the capital market, complicating access to financing for individuals and companies. This resulted in higher financing costs, especially for mortgage loans, with higher interest rates, lower supply and shorter terms, as well as stricter requirements for loan approval.

Although interest rates for mortgage loans are still high today, this is partly due to international rates. However, had capital market depth continued to decline, it is likely that these rates would have remained high, had the depth of the capital market continued to decline, it is likely that these rates would have remained high or even increased.

In December 2022, the Superintendency of Pensions made a projection of how much the stock of pension fund assets in the local market would increase with the pension reform that the government presented at the end of 2022. Although this aspect of the reform is different from the one currently being discussed in Congress, it serves to give an idea of how this discussion can help the development of the local market.

Given the importance of maintaining a strong capital market, it is crucial to take measures that expand rather than reduce it, as was the case with withdrawals. Although the main objective of pension reform is to improve pensions, it also has the potential to strengthen the capital market. Therefore, it is essential to reach an agreement and recover what has been lost in this aspect.

Vincent Dourthé

Private Debt Team Fynsa AGF