Thursday, april 29, 2021

Ministry of Finance reports withdrawals for US$ 3,232 million from the Sovereign Wealth Funds in April

During April 2021, a total of US$ 3,232 million were withdrawn from the Sovereign Wealth Funds. Of these, US$ 1,482 million were withdrawn from the Pension Reserve Fund (PRF) on April 8th and US$ 1,750 million from the Economic and Social Stabilization Fund (ESSF), on April 22nd.

In the case of the PRF, its objective is to support the financing of the fiscal obligations derived from the state guarantee of basic solidarity old-age and disability pensions, as well as solidarity pension contributions. In this way, the financing of future contingencies in the matter of pensions is complemented. According to the Fiscal Responsibility Law, the amount of resources that can be withdrawn annually from the PRF cannot exceed one third of the difference of the respective year in pension obligations, and the respective total expense incurred in 2008, adjusted for inflation as measured by the Consumer Price Index. Thus, during the years 2017, 2018, and 2019, US$ 313.95 million, US$ 525.05 million, and US$ 576.51 million were withdrawn, respectively.

In the context of the pandemic, Law No. 21.227, which empowers access to unemployment insurance benefits of Law No. 19,728, established in Article 19, under exceptional circumstances,  notwithstanding the provisions of Article 8 of the Fiscal Responsibility Law, the amount of resources that will be withdrawn from the PRF during the years 2020 and 2021 will correspond to the entire difference produced between the total expenditures of each year, for the payment of the pension obligations of the respective year, and the total expenditure incurred for in 2008, adjusted for inflation. Thus, in 2020, US$ 1,576 million were withdrawn, equal to the obligations associated with the Solidarity Pillar for that year.

According to the 2021 budget law, the total amount that will be withdrawn from the PRF in 2021 will be $ 2,116,665 million pesos, which is equivalent to about US$ 3,020 million, at the exchange rate observed on April 20th. In this context, the withdrawal of US$ 1,482 million made on April 8th corresponds to about half of the resources that will be used from the fund this year. The remaining balance is expected to be withdrawn in the coming months.

It should be noted that according to the provisions of Law Nº 21.225, which establishes measures to support families and micro, small and medium-sized companies due to the impact of the COVID-19 disease, no contributions will be made to the PRF in 2020 and 2021.

In the case of the ESSF, this fund is an additional source of financing for the Central Government that allows for the financing of fiscal deficits, the annual contribution to the PRF and making repayments of the public debt. Although the Republic of Chile has broad access to financing in the capital markets in competitive terms, the use of the ESSF has the advantage of allowing financing of fiscal needs while reducing the need to resort to public debt.

In this context, April’s withdrawal of US$ 1,750 million complements the US$ 4,090 million withdrawn from the fund in 2020 to finance the budgetary needs of the Central Government that have increased due to the pandemic.

It should be noted that eventual additional withdrawals from the ESSF could materialize in the event of significant changes in the government's financing needs.

At the end of March 2021, the market values of the PRF and ESSF were equivalent to US$ 10,080 million and US$ 8,552 million, respectively. Considering the expected amount to be withdrawn this year, the PRF and ESSF should have resources estimated around US$ 7,060 million and US$ 6,802 million, respectively, by the end of 2021. The final value of each fund depends on the profitability of its investments in the year and, in the case of the PRF, on the effective amount withdrawn in dollars, which depends on the evolution of the exchange rate.

The amounts withdrawn from both funds will be auctioned according to the process implemented as of April last year.


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