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March 24 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says in a new report that recent changes to the pension and broader public finance frameworks are neutral for Poland’s sovereign ratings (A-/A/Stable). Fitch’s assessment of Poland’s sovereign creditworthiness will continue to focus on underlying fiscal consolidation, as well as reduction of external indebtedness and income convergence.
The most substantial amendment, at least in the short term, is the transfer to the publicly-run pay-as-you-go pillar (PAYG) of 51.5% of financial assets held by open pension funds (OFEs), which took place in February 2014. OFEs have been financed by a portion of gross wage contributions, which they used to accumulate financial assets. Other changes include making future contributions to OFEs optional rather than mandatory and the transfer to the PAYG system of all funds 10 years before retirement.
Fitch estimates that the transfer of OFE assets reduces the gross general government debt (GGGD) ratio (on a ESA 95 basis) by 7.5 percentage points. The agency judges this development to be rating-neutral given that the reduction in public debt (as well as debt-servicing costs) is offset by an increase in long-term state pension liabilities. The changes are being challenged at the Constitutional Court, but Fitch does not expect this to result in a major reversal, including for instance the cancellation of the asset transfer. The changes to the pension system came amid an increasing debt burden and mounting external pressure to narrow the budget deficit in the context of the EU’s Excessive Deficit Procedure. The diversion of a part of gross wage contributions from the PAYG pillar to finance OFEs created a gap in the social security budget that had to be filled via increased public debt issuance, in the partial absence of other fiscal consolidation measures. This built up a considerable additional public debt burden, and in recent years public debt (calculated by the government using a separate methodology) had been hovering close to 55% of GDP, a key legal threshold.
A new stabilising expenditure rule (SER) in effect starting with the 2014 budget aims to boost the anti-cyclical role of public spending and introduces debt thresholds at 43% and 48% of GDP. The SER was adopted to comply with enhanced EU-level fiscal surveillance and could support increased fiscal discipline. However, the suspension of a previous rule to enable the revision of the 2013 budget, as well as the likelihood that public debt will remain in breach of the lower threshold for several years against a backdrop of fiscal austerity, raises the risk that fiscal rules may be breached in future.
The report, entitled ‘Polish Pension Reform ’ is available at www.fitchratings.com or by clicking on the link below.
Link to Fitch Ratings’ Report: Poland Pension Reform: Neutral for Ratings, Focus Remains on Fiscal Performance