Poland's creditworthiness unaffected by pension reform - Moody's
September 6, 2013
Poland’s pension system reform that will include a transfer of bond holdings of private pension funds to the state will have a positive effect on the public finance in the short term, with public debt down, while the country’s creditworthiness will remain unaffected, Moody's rating agency said on Thursday.
The Polish PM Donald Tusk said Wednesday the government will turn back its 1999 partial privatization of the social security system, sending the portion of the private pension funds (OFE) invested in Treasury bonds back to the social security board ZUS and making further participation in the system optional.
"Although these changes will hurt domestic capital market liquidity and increase the government’s pension-related contingent liabilities, government finances will benefit in the short-term," Moody's analysts said.
"Nevertheless, the fiscal impact is likely to be positive as it implies a reduction of debt metrics, granting more fiscal space with respect to the country's fiscal and debt rules," the comment read.
"The potential increased revenues from workers that switch back to ZUS will also greatly aid the fiscal consolidation effort and allow the government more room for policy manoeuvre in order to support the nascent economic recovery."
Improvement will already be visible in the fiscal accounts for 2013, assuming that the reform is approved before the end of the year.
"This will decrease general government debt to below 50% of GDP by the end of the year, and despite our forecast of an underlying fiscal deficit of 4.4% of GDP, the fiscal balance would switch to a surplus of around 3% of GDP for the year," Moody's said.
At the same time, the T-bond market will shrink slightly.
"Demand for government debt securities would decrease due to lower OFE asset levels, and the directive that they would be barred from investing in these instruments," Moody's analysts said. "Government debt held by ZUS would be rolled over without having to go through regular market channels, decreasing the primary supply of government bonds."
Despite positive impact on public finance, proposed changes do not fundamentally alter Poland's creditworthiness, in Moody's view.
The changes proposed "imply a reversal" of the 1999 reform, the rationale read. Moreover, the reversal also risks undermining investor confidence as it could prompt unfavorable perceptions about respect for longer-term investments. Moreover, future reforms may be required in order to ensure the sustainability of the pension system."