The Philippines should brace for higher interest rates and a credit rating downgrade if the Social Security System (SSS) pension hike pushes through without remedial measures, the Department of Finance (DOF) claimed on Friday.
In a statement, Finance Secretary Carlos Dominguez 3rd said the Philippines’ stable interest rate regime could be threatened by the proposal of the Congress to increase the monthly pensions of SSS beneficiaries starting this January without a corresponding increase in members’ contributions.
“The across-the-board increase in SSS monthly pensions without a corresponding adjustment in the contributions of the members would reduce the fund life of the SSS, possibly prompting a downgrade in our credit rating,” Dominguez said.
In a memorandum sent to President Rodrigo Duterte in December last year, Dominguez and his fellow economic managers—Budget and Management Secretary Benjamin Diokno and Socioeconomic Planning Secretary Ernesto Pernia—said that without an accompanying “upward adjustment or restructuring of the contribution rate,” the proposed pension hike would unduly jack up the unfunded liabilities of the fund from P3.5 trillion to P5.9 trillion.
“The SSS Reserve Fund, which is tapped when contributions of SSS members are not enough to cover the benefit payments made to its members, is currently projected to last until 2042. The proposal by the Congress is foreseen to cut the actuarial life of the fund by 14 to 17 years from 2042 to 2025-2028,” according to the joint memo.
If approved, the proposal may adversely affect the government’s credit rating and the SSS would be bankrupt and left with no funds for other members in the future, they said.
At present, the government has an investment grade rating from Moody’s Investors Service, Fitch Ratings and Standard & Poor’s Global Ratings.
Earlier, SSS President and Chief Executive Officer Emmanuel Dooc said the state-run pension fund needs a number of remedial measures to extend its actuarial life and will allow an increase in pension benefits.
Among the conditions were an increase in contribution from 11 percent to 17 percent; lifting of the P16,000 maximum salary credit to P20,000; increasing the minimum salary credit from P1,000 to P4,000; and indexation of pension and contribution to inflation rate which would need legislative measure.
PH to withstand US rate hike
Without the SSS pension hike, the DOF said the Philippines has the capacity to dampen the effects of the impending normalization of US interest rates.
In December last year, the US Federal Reserve raised its benchmark interest rate for the first time in a year, signaling that rates may continue to rise faster than expected in 2017.
In an economic bulletin, Finance Undersecretary and Chief Economist Gil Beltran said emerging markets like the Philippines are now bracing for the impact of a quick rate increase by the Fed as yields on government IOUs would likely rise as investors seek higher risk premiums.
But based on DOF data, the average primary nominal bond rate slightly fell ahead of the expected US rate increase from 3.96 percent in 2015 to 3.86 percent in 2016.
“The reversal of US QE [quantitative easing]policies will push up the country’s real borrowing costs, but with improved fundamentals, the rise will be dampened,” Beltran said in his latest report to Dominguez.
The country’s real Treasury Bond rate (10-year term) also dropped 3.94 percentage points from 4.61 percent to 0.67 percent between 2000 and 2016 owing to improved macroeconomic fundamentals, Beltran noted.
Also, the country’s gross domestic product (GDP) has expanded by above 6.0 percent, while inflation dipped to an average of 3.4 percent and the national government’s debt ratio fell to 43 percent as of October 2016, according to the DOF.
“This was attained through fiscal strengthening with the passage of the VAT [value-added tax] reform law in 2006, debt management measures, prudent spending and appropriate monetary policy,” Beltran said.
“The credit rating agencies (CRAs) recognized these positive factors and gave the country an investment grade rating in 2013,” he added.
But even before the country attained its investment grade status, Beltran said the government’s real bond rate has already narrowed to an investment grade-equivalent as early as 2008.
“The financial markets recognized the country’s investment grade status earlier than the CRAs did,” Beltran said.