Wed, Feb 01, 2012 - Page 10 News List

Health costs to push G20 credit downgrade: S&P

AGING problem:Rising costs caused by populations getting older and birthrates falling are threatening the credit ratings of developed countries, the agency says

Reuters, New York and Tokyo

Ratings agency Standard & Poor’s warned it might downgrade “a number of highly rated” G20 countries beginning in 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to aging populations.

Developed nations in Europe, as well as Japan and the US, are likely to suffer the largest deterioration in their public finances in the next four decades as more elderly people strain social safety nets, S&P said in a report.

“Steadily rising healthcare spending will pull heavily on public purse strings in the coming decades,” S&P analyst Marko Mrsnik wrote in the report. “If governments do not change their social protection systems, they will likely become unsustainable.”

If no reforms are adopted, healthcare-related credit downgrades would likely start within three years, eventually leading to an increase in the number of junk-rated countries as of 2020, the study showed.

Healthcare will likely be the fastest-growing expenditure for developed countries, which already have high social protections and rapidly worsening demographic profiles.

For example, Japan’s population is expected to decline by 30 percent by 2060, with two out of every five people turning 65 or older, according to official data.

Japan’s welfare spending, which includes pensions and health, is expected to reach nearly ¥108 trillion (US$1.4 trillion) in the current fiscal year, about 22 percent of GDP.

By 2025-2026, spending is forecast to hit ¥141 trillion.

“Over time it must be a real problem for Japan,” said Adrian Foster, head of financial markets research at Rabobank International in Hong Kong.

“There’s a call for authorities to push through fiscal reform. When you look at the government, they seem to lack any real ability to respond to it,” he added.

Falling fertility rates and a rapidly aging population are problems facing most of Japan’s richer neighbors, too. Taiwan, South Korea and Singapore have flirted with policies aimed at boosting marriage and childbirth, but with limited success.

South Korea is the most dramatic example of the trend. In the past 40 years, as its economy has boomed, it has gone from having one of the highest birthrates among developed countries to one of the lowest.

By 2050, almost 40 percent of the population is likely to be over the age of 65.

A report released by the South Korean Ministry of Strategy and Finance in July last year warned that the national debt would jump to 138 percent of GDP in 2050 as pension and health insurance costs soar, from about 34 percent last year.

Emerging market countries, especially in Southeast Asia, have a little more room to maneuver because of more favorable demographic dynamics and economic growth, S&P said.

However, even in that region the picture is changing — in Thailand, for example, the proportion of the population aged over 60 is projected to rise to nearly a quarter by 2030 from about 13 percent.

However, Asia might suffer less from this demographic shift than Western nations because, by and large, the social welfare net in the region is not as extensive, Rabobank’s Foster said.

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