MANILA, Philippines — The Philippines is at risk of a credit downgrade if the pension system of the military and uniformed personnel (MUP) is not fixed as this will continue to eat a huge chunk of the national budget, Finance Secretary Benjamin Diokno has warned.
During the Senate committee on finance hearing of the Cabinet-level Development Budget Coordination Committee on Wednesday, Diokno argued that the current MUP pension system is not a real one.
As the MUP continues to enjoy the benefits of a pension system even without any contribution into the fund, the government appropriates a budget annually for it.
“If you let this continue, the next administration will be faced with a huge problem,” Diokno said.
“Our current situation is that the amount that we allocate for the MUP pension is much higher than the current operating budget of the military. That’s how heavy it is,” he said.
Funding for the National Expenditure Program every year comes from both revenues and borrowings by the government.
The amount and interest rate afforded to the Philippines depends on its credit rating by major agencies Moody’s, Fitch and S&P – as well as Japanese raters R&I and the Japan Credit Rating Agency.
“If we continue to ignore the MUP pension, our investment grade may become junk,” Diokno said.
“It will be more difficult for us to finance our budget and borrow money and also difficult for the private sector to borrow money,” he said.
Credit ratings also depend on the country’s outstanding debt as a share to the overall economy. At present, debt-to-GDP ratio is still at 61 percent as of the second quarter from as low as 39 percent before the COVID pandemic.
This remains above the internationally accepted threshold of 60 percent, which puts the Philippines at a vulnerable spot in terms of its capacity to pay off financial obligations.
“We have to go back to where we were before the crisis because credit rating agencies look at that,” Diokno said.
“You can’t have a pension system where there are beneficiaries but no contributors. We need to address it, otherwise it will become a huge component of the national budget. And that is unsustainable,” he said.
The economic team of the Marcos administration has been rooting for a better investor-grade sovereign credit rating through its “Road to A” program.
An A rating would affirm the Philippines’ creditworthiness and serve as a signal to both domestic and global markets that the country is conducive to long-term investments.
Currently, the Philippines has a BBB+ sovereign credit rating from S&P Global, while Fitch affirmed its BBB rating and revised its outlook from negative to stable.
To achieve an A rating, the government has a three-pronged strategy that focuses on achieving solid economic growth, prudent fiscal management and strong governance standards and institutions.
On fiscal management, the government is targeting to sustain tax reform while maintaining growth-oriented fiscal operations, as well as balancing risk-and-return trade-offs through debt management and diversification.
Diokno further noted that the House of Representatives already approved the consolidated MUP bill, a fine-tuned proposal based on the emerging consensus developed by the economic team with different MUPs in the country.
The Senate would have to pass its own version of the bill.
“If you pass that, then [the problem] is solved,” Diokno told senators.
Nonetheless, Sen. Ronald dela Rosa, a retired police officer, maintained that not everything passed by the House would automatically get Senate approval.
“This will go through rigorous deliberation. We will wait for that once it is passed to us… We will look into it,” Dela Rosa said.
“But they (MUP) were threatened by the term fiscal collapse. We do not want to be the cause for the government to fall apart,” he said.