Currency Swaps Transform Chile's Safest Pension Fund Into Loss Machine

The crisis engulfing the AFPs' Fund E is not merely an episode of poor pension performance: it is the story of how a currency derivatives strategy, concentrated in five large international banks, transformed the most conservative investment vehicle in the Chilean system into a source of losses that is now shaking the foundations of the country's regulatory and political debate.

According to Superintendencia de Pensiones data cited by La Tercera, Fund E posted a return of -4.92% in September, bringing its year-to-date decline in real terms to 10.39%. The central cause was not direct exposure to risk assets —the fund invests 86.4% in domestic instruments— but rather a position in foreign currency swaps that swung from a positive US$1.348 billion in September 2025 to a negative US$7.735 billion a year later. The main counterparty banks for those operations —Bank of America, Société Générale, BNP Paribas, Barclays and Deutsche Bank— account for the bulk of the negative exposure, with positions ranging from US$1.375 billion with the US bank to US$543 million with the German one. The question now reverberating across the industry, according to Diario Financiero, is twofold: did regulators fail to flag the herd effect that drove managers to take on similar, simultaneous positions? And could it be repeated once the generational funds contemplated in the pension reform come into force? Gonzalo Trejos, head of strategy at Nevasa, takes a relatively optimistic view: he notes that, for the first time in years, fixed income could play a genuine diversifying role, and that there is room for Fund E to recover ground in 2027.

This internal turbulence in the pension system coincides with mounting pressure on the broader macroeconomic picture. A forum of economists aligned with the opposition this week did not rule out the possibility of a GDP contraction this year and questioned the Finance Ministry's management, while Banco de Chile's chief economist, Rodrigo Aravena, preferred to frame the scenario as one of transitory shocks layered over structural challenges. The distinction matters: whether we are dealing with transitory shocks or permanent fragilities determines whether monetary policy adjustments gain traction or merely buy time. The government itself implicitly acknowledges the scale of the fiscal deterioration by projecting a 59% reduction in the Treasury's cash position for 2027, a consequence of state debt payments, and by warning that sovereign funds will remain below the threshold recommended by the IMF.

Public perception tracks that deterioration. Two polls released this week —Cadem and Criteria— put President José Antonio Kast's approval at around 28%-30%, with disapproval at record highs and 87% of respondents viewing the economy as stagnant or in retreat. Pessimism about the country's future reached its highest level since Cadem began tracking the variable in January 2015. That 63% believe there are reasons to continue protesting —seven years on from the social outbreak— is a data point already anticipated by the opposition economists' forum, which did not rule out an intensification of social mobilization.

Against that backdrop, the trade negotiation with Washington takes on strategic urgency but also political fragility. November and January emerge as key dates, according to Diario Financiero: the US midterm elections could reshape the Trump administration's negotiating stance, while the decision on a potential 15% tariff on Chilean copper bears directly on fiscal revenues and sector profitability. In parallel, the government will submit in December a foreign investment review mechanism —the content of which is not yet known— that responds to months of pressure from Washington but opens a deeper debate on economic sovereignty. The tension with China, Chile's top trading partner with exchanges exceeding US$67 billion in 2025, is the invisible face of that negotiation: an analysis by the Peterson Institute cited in La Tercera warns that the Reciprocal Trade Agreements being pushed by Washington are aimed precisely at decoupling signatories from Beijing. Sofofa this week marked the 20th anniversary of the FTA with China with a seminar attended by Foreign Minister Francisco Pérez Mackenna and former president Eduardo Frei, and is preparing a high-level business mission to Beijing in November, in the framework of the APEC CEO Summit.

In mining, the week closed with mixed signals. The strike at the Centinela mine —a subsidiary of Antofagasta Minerals of the Luksic group— was defused following an agreement that includes a termination bonus of $24 million and the renewal of shift schedules for the 709 workers involved, equivalent to 22% of the company's own workforce. The mobilization had begun on October 7. At the same time, Australian firm Copper Limited is advancing toward 100% ownership of the mining operation linked to Martín Borda at Sierra Atacama, with plans to incorporate open-pit mining, in a deal that reflects foreign capital's interest in Chilean copper assets at a time when the country is debating how to accelerate the transition of exploration concessions —more than 32,000 permits over 9.5 million hectares— into actual production.

In equity markets, Falabella was the positive highlight of the week, setting a new stock market record and overtaking SQM in market value, with a 3.17% gain following an upgrade to its credit rating by Fitch Ratings. The data point illustrates a curious shift: financial retail is gaining market ground on lithium mining, precisely as tariff uncertainty weighs on commodities.

What to watch closely: the release of details on the foreign investment review mechanism in December; the impact of the US midterm elections on Washington's negotiating stance with Santiago; the evolution of Fund E and the regulatory response from the Superintendencia de Pensiones; and the outcome of the race for the CPC presidency, where Richard von Appen, Antonio Walker and Félix de Vicente are vying for a leadership role that will have to articulate the business community's voice in one of the most complex moments for the Chilean economy in a decade.