09/01/2023
To Fund or Not to Fund?
by UP APSM Batch Bejeweled
Recently, the House committee on banks and financial intermediaries approved House Bill No. 6398, otherwise known as the Maharlika Wealth Fund bill. The bill has sparked controversy among the public regarding its necessity and efficiency. Some have also voiced out their skepticism about the newly introduced house bill. But what should we know about MWF, and why should we be against it?
What is the Maharlika Wealth Fund?
The proposed Maharlika Wealth Fund (MWF) is a sovereign wealth fund (SWF) that aims to invest in high-end national development projects and assets that would raise revenues and maximize the profitability of state assets. Sovereign wealth funds are usually acquired from a country's excess wealth and surplus reserves, carried out with the purpose of enhancing sustainable growth.
However, in the case of the MWF, and as proposed by Speaker Ferdinand Martin Romualdez, with the hand of the President's son, Sandro Marcos, the start-up capital will be derived from government pension funds and banks.
Initially, HB No. 6398 called for a total of P 275 billion tol be gathered from the national budget and government financial institutions (GFIs) such as GSIS, SSS, Land Bank, and DBP. Additionally, annual contributions to the fund will be expected from BSP, PAGCOR, the national government, and taxes from natural resources and public borrowings.
There is still no detailed outline concerning the projects the MWF will invest in. It is implied that the Maharlika Wealth Fund Corporation (MWFC), a government established by the bill, will have the power to determine the assets and projects the fund will invest in. Its board of directors includes the President of the Philippines as chairman and representatives of the GFIs as board members. They will be responsible for managing the combined capital from GFIs that will be utilized for investing in intensive projects that may acquire high returns.
Nevertheless, the bill raised plenty of concern among various senators and lawmakers, including Senators Joel Villanueva, Chiz Escudero, Aquilino Pimentel, and Imee Marcos. Its potential to expose pensioners to high risks and its lack of solid management safeguards are especially unnerving. Reinforcing this notion, Senate President Miguel Zubiri asked a select group of senators to scrutinize and study the proposal meticulously.
Echoing this point of view, the MWF also received criticisms from the public, specifically the teachers who contribute and receive pensions from the Social Security System (SSS) and Government Service Insurance System (GSIS).
Last Monday, Bayan Muna Partylist members, together with the Alliance of Concerned Teachers, rallied in protest of the MWF. They were concerned that investing in the MWF would endanger their contributions to SSS and GSIS. Thankfully, due to public clamor against utilizing funds from pension systems, Sandro Marcos confirmed the recent removal of SSS and GSIS as sources of funding in the bill. However, the fact that some lawmakers brazenly considered appropriating funds from pension systems ultimately raises the specter of misguided policy making.
During a public consultation, ACT Teachers Party-list Rep. France Castro, expressed their disapproval of the bill, arguing that it will only burden them. Aside from paying taxes on oil and basic commodities, the public will lose Php 50 Billion. ACT Spokesperson, Ruby Bernardo also voiced their concern regarding the different laws and tax exemptions of the MWF.
Aside from the Philippines, other countries have developed and explored a sovereign wealth fund. The China Investment Corp, which manages equity and infrastructure investment overseas, is one of the most successful sovereign wealth funds in the world with $1.2 trillion in assets. CIC Capital, a subsidiary of the corporation, attained 19.5 Billion of investments since 2019 through Tank & Rast in Germany and the Kumport container terminal in Turkey. In the previous year, CIC restructured its operations by allowing both CIC International and CIC Capital to collectively oversee investments; these two subsidiaries are guided by two committees to manage public and non-public assets.
On the other hand, Middle East sovereign wealth funds experience subpar performance in their investments caused by the mishandling of public funds and governance issues. Qatar Investment Authority, Abu Dhabi Investment Authority, and Kuwait Investment Authority all suffer from data disclosure issues. In Southeast Asia, Malaysia’s sovereign wealth fund succumbed to transparency issues and corruption scandals in 2020.
Why the MWF isn’t appropriate - for now
Most SWFs are financed by excess money or surplus foreign reserves, usually present in countries with huge (commonly natural resource based) export-oriented industries. Such is the case in Norway, where its Government Pension Fund Global (a SWF) is capitalized by the nation’s surplus revenues in the petroleum sector. Non-commodity SWFs, such as Singapore’s GIC, rely not on any particular commodity to capitalize their funds, but rather trade surpluses that can be reflected in the national balance of payments, specifically the current account. Essentially, the current account reflects the net flow of money going in and out of the country: a current account surplus meaning more money flows into, rather than out of, the country. When this happens, a country is a net lender globally, meaning it can afford to invest excess reserves in other countries.
This is not the case in the Philippines. Neither do we have huge export-oriented industries that generate surplus revenues, nor do we have more money flowing into, rather than out of, the country. This is the very reason why in HB 6398, MWF’s initial funding requirements are to be appropriated from existing state financial institutions. Such action contradicts the very purpose of SWFs to invest surplus money, that of which the country does not have at the moment. Unless the country registers a significant current account surplus and/or has surplus revenues in export-oriented industries, it simply is not sustainable nor prudent to have a SWF.
Furthermore, upon looking at the Philippines’ current fiscal context, diverting foreign reserves away from the BSP seems counterproductive. It can be recalled that earlier this year, the dollar to peso (USD - PHP) exchange rate reached an all-time low of PHP 59 : $1. To combat the strong depreciation of the peso, the BSP utilized some of its foreign reserves, spending at least $12 Billion this past year in foreign exchange markets to bring up the value of the peso. Such actions, while warranted, have led to a consecutive decrease in the BSP gross international reserves (GIR) from the record $110 Billion in December 2020, to $93 Billion in November 2022.
As of this writing, lawmakers have moved to replace SSS and GSIS as part of the sources of MWF’s funding requirement. Instead, for the first two years of the fund’s implementation, the Php 150 Billion requirement left by the removal of the two pension systems are to be replaced by 100% of the BSP’s declared dividends from its investments ; investments which help form a chunk of the GIR. At a time of world wide inflation and volatile currency depreciation, to decrease the central bank’s warchest in defending the peso is at best counterproductive, and at worst foolish. While the BSP has enough in the GIR to cover 7.5 months worth of imports (well above the standard 3 months), given current uncertainties in the global economic landscape, it would be wiser to allow the BSP to maintain higher foreign reserves. Diverting billions of dollars worth of foreign reserves away from the BSP at this moment would simply weaken the country’s ability to maintain a stable foreign exchange rate.
Lastly, many have raised issues over the MWF’s transparency and accountability. Despite Finance Secretary Benjamin Diokno’s assurance that the MWF has safeguards in place to prevent suffering the same fate as Malaysia’s 1Malaysia Development Berhad (1MDB), several representatives of public interest groups are not quite convinced. Lawmakers who are for the MWF emphasize that the fund's management will undergo three layers of audit - an internal auditor, an external internationally recognized auditing firm, and the Commission on Audit (COA). However, critics have thrown caution that the Philippines has had a long history of mismanaged funds such as the Coco Levy scam, PhilHealth scandal, and the SSS funds that were used for politically-tainted purchase of stocks. This is further exacerbated by the weakness behind the leadership structure of the MWF that gives leeway for the head of the sovereign investment fund, which is the President, and his proxies to politically interfere. Many have noted that the mentioned Coco Levy fraud was started by the President’s father and former dictator Ferdinand Marcos Sr. and his cronies to supposedly develop the coconut industry, but was instead used for personal gain and profit. Others have also questioned the urgency of creating and passing the MWF along with the real motivations behind the action.
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