Fitch Ratings-London/New York-25 February 2021: Fiscal challenges and social grievances are adding urgency to a new wave of pension reforms in Latin America that could be relevant for sovereign ratings, Fitch Ratings says in a new report.

Latin America’s population is still among the world’s youngest, but it is ageing at one of the fastest paces, and its savings patterns stand out as being especially low given the coming demographic pressure. But reform efforts will face challenges after years of weakening growth, social discontent and persisting informality, all compounded by the coronavirus shock.

Low retirement incomes and generally poor coverage are making “privatized” defined-contribution (DC) regimes a growing social grievance. Therefore, Chile, Colombia, Mexico and Peru still face fiscal risks that their earlier privatizations were meant to avoid and the challenge of increasing retirement savings without hindering growth or formal job creation. Populist resistance to privatized regimes came to a head during the coronavirus crisis, prompting Chile and Peru to allow early withdrawals that add to their long-term issues.

Pension pressures are a key contributor to the fiscal woes of sovereigns with predominantly public defined-benefit (DB) regimes, reflecting demographic change, further damage from the coronavirus crisis and populist counter-reforms in some countries. Parametric reforms are a necessary but insufficient condition for structural fiscal consolidation, as seen in Brazil, and, alongside other fiscal adjustments, these will be relevant for resolution of the Negative Outlooks on Panama and Uruguay (both rated: ‘BBB-’).

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