BUSINESS associations and groups of economists issued a joint “statement of concern” on Monday on the proposed creation of a P250-billion sovereign wealth fund (SWF) using state pension funds and other government assets as seed capital, as envisioned in House Bill 6398.
The Foundation for Economic Freedom, Financial Executives Institute of the Philippines, Makati Business Club, Management Association of the Philippines, Movement for Good Governance, Competitive Currency Forum, and the Filipina CEO Circle, were among the 12 signatories who expressed their reservations to the establishment of the Maharlika Wealth Fund (MWF). Their reservations were based “on the principles of fiscal prudence, additionality, solvency of social pension funds, contingent liabilities, monetary independence of the Bangko Sentral ng Pilipinas (BSP), government in the economy, and transparency.”
For one, they said, the Philippines suffers from trade and fiscal
deficits, unlike other countries which have SWFs. “With economic recovery, the country is now experiencing large deficits, reflected by the decline in international reserves. Massive public spending has increased the fiscal deficit to 8 percent-9 percent of Gross Domestic Product (GDP) from only around 3 percent before the pandemic, and the national government debt has ballooned from 40 percent to 64 percent of GDP. Government-owned and -controlled corporations (GOCCs) are no different; they are not generating large operating surpluses.”
Pension funds
They also saw “no need, or even justification, to pool the reserves of government financial institutions (GFIs) and pension funds into larger amounts in order to earn higher returns. Requiring the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) to fund the SWF on the ground that they invest in government securities is in no way a creation of wealth. LBP and DBP deposits exist because of the requirement for GOCCs to deposit their funds in government financial institutions. Hence, there is no creation of wealth, or generation of new deposits, but mere round tripping, when funds of LBP and DBP are diverted to the SWF.”
The groups stressed, as the goal of the state pension funds is preserve their capital to give sufficient returns to their members, that they need to invest conservatively, instead of “[exposing] their members’ retirement funds to investments in assets with additional market risks and performance risks.” Investing in risky tools and assets will needlessly reduce the already short actuarial life of the pension funds, which currently stand at 40-43 years, which is less favorable than the international standard of 70 years.
Other signatories to the joint statement include the Integrity Initiative Inc., Philippine Women’s Economic Network, UP School of Economics Alumni Association, and Women’s Business Council Philippines Inc.
BSP independence
While the most recent version of HB6398 removes gross international reserves as seed capital to the Maharlika Fund, it still requires the BSP to contribute 50 percent of its dividends. The groups reminded lawmakers, “Under the newly revised BSP charter, whatever BSP declares as dividend should remain with BSP as equity infusion of the National Government to complete its P250-billion capitalization. Instead of putting in more capital to the BSP, the SWF bill, in effect, deprives it of quicker capitalization and in the process, undermines the BSP’s independence and its ability to discharge its role as the country’s central monetary authority and systemic risk regulator.”
BSP Gov. Felipe M. Medalla already expressed his own fear that the MWF will go the way of 1Malaysia Development Berhad (1MDB), a sovereign wealth fund, of which some $700 million ended up in the personal accounts of then Prime Minister Najib Razak. (See, “BSP chief joins concerned groups on Maharlika Fund,” in thr BusinessMirror, December 5, 2022.)
HB6398, spearheaded by House Speaker Rep. Martin Romualdez and Deputy Majority Leader Sandro Marcos, also “fails to realize that sequestering the dividends of GOCCs to the SWF will also impair the National Government’s own ability to fund the fiscal deficit and increase the pressure to borrow more from both domestic and foreign sources. In the first place, we see no guarantee that this diversion of funds will result in higher returns to the National Government but instead more definitely result in higher interest rates and greater crowding out of private sector investments.”
“In more ways than one, the proposed SWF will create a platform for the government to actively participate and intervene in the economy, a role which administrations since 1986 have tried to de-emphasize, learning the lessons of statist interventionist economic policies which resulted then in high fiscal deficits, high debt, and large losses of government corporations.”
Other provisions in HB6398 also removes safeguards for good governance, [signalling] a return to less transparent and centralized economic decision making as opposed to the market-oriented, decentralized private sector economy which has been the engine for growth in the last 36 years.”
The groups suggested Malacañang and lawmakers instead “continue to implement existing initiatives to strengthen the areas of health, education and infrastructure, especially digital and agriculture, that can boost productivity and lower inflation. These initiatives can be executed within existing legal framework, without resorting to an untested approach with many potential infirmities.”