RPT-Fitch: Pension change looks neutral for Polish sovereign

Tue Sep 10, 2013 6:30am EDT

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Sept 10 (Reuters) - (The following statement was released by the rating agency)

Polish pension reforms announced last week look broadly neutral for the sovereign's credit profile, assuming the authorities adjust public debt limits to take account of the fall in the public debt ratio that will result, Fitch Ratings says. The initial favourable impact on the headline public debt ratio may be offset by the reduction in the stock of assets to meet future pension provisions and a consequent increase in long-term state liabilities.

Potential challenges in the Constitutional Court leave the reforms subject to legal uncertainty. The long-term impact depends on many factors, not least interaction with previous reforms, such as the May 2012 pensions bill. Our full assessment of the changes to open pension fund (OFE) legislation will depend on the final, detailed proposals and accompanying legislation, and on any impact on sovereign funding conditions.

Transferring PLN120bn (US37bn) of sovereign debt held by OFEs to the social security board (ZUS) and cancelling it would narrow the gap between Poland's public deficit and debt and the 'A' category median. Debt to GDP could fall by 7-8pp from around 53% on the national methodology at end-2012 and annual deficits narrow by close to 1pp, depending on the number of people who choose to keep part of their future pension contributions in OFEs or opt for all their future contributions to go to ZUS (the government has proposed that existing participants be given three months to choose).

However, while pending OFE reform has complicated fiscal forecasting, the authorities' ability to deliver a durable improvement in public finance sustainability has remained a key element of our ratings assessment. The government has indicated that it will lower both its first (50%) and second (55%) legal public debt thresholds by an amount equivalent to the drop in gross general government debt to GDP that the transfer achieves. Limiting the additional fiscal space the reduction in debt to GDP might have created as the sovereign approached the 55% threshold should reduce scope for pronounced fiscal loosening that might endanger medium-term consolidation, one of our potential triggers for a negative rating action.

Keeping this commitment and implementing the new and more comprehensive structural public spending rule, which would tie spending to GDP growth, would be important to limit further deterioration to fiscal credibility after recent fiscal slippage and the suspension of the 50% debt threshold. It would also counter objections from some observers that the pension overhaul was motivated by populist pressures to loosen underlying spending. Such measures are particularly important in underpinning consolidation, as political appetite for stronger deficit reduction will be tested ahead of elections in 2014-2015. Any impact on Poland's sovereign bond market remains unclear. OFEs will be prohibited from buying Treasury securities, and the removal of a large chunk of T-bonds could affect market depth, although we do not think this would have a direct impact on Poland's ability to fund itself, partly because of lower funding needs. The proportion of government bonds held by non-resident investors would rise to 45% from 36%, but Poland has not given any indication of being at high risk of capital flight despite recent financial market volatility prompted by Fed tapering concerns.

We revised the Outlook on Poland's 'A-' rating to Stable from Positive in August, reflecting fiscal slippage (mainly due to weaker growth) and the damage to fiscal credibility from the suspension of the first legal public debt threshold.

The government announced last week that Treasury Securities, state-guaranteed bonds and other non-equity assets will be transferred from OFEs to ZUS, and future contribution to OFEs will become voluntary. Remaining OFE assets will transfer gradually to ZUS in the 10 years before an individual reaches the pension age. While this will reduce the cost of funding the shortfall in ZUS contributions, it will increase the government's future unfunded pension liabilities, which are also a factor in our analysis.