Does the P250-B Maharlika Wealth Fund make sense?

Ian Nicolas Cigaral - Philstar.com

MANILA, Philippines (First published on Dec. 1, 2022, 5:12 p.m.) — Lawmakers allied with President Ferdinand “Bongbong” Marcos Jr. are pushing for the creation of a P250-billion sovereign wealth fund that, they said, would raise revenues for the cash-strapped government by "maximizing" the profitability of investible state assets.

House Speaker Martin Romualdez — Marcos’ cousin — filed House Bill 6398 that seeks to establish what would be known as the Maharlika Wealth Fund.

Romualdez co-authored the measure with Deputy Majority Leader Ferdinand Alexander "Sandro" Marcos — the president’s son — and five other lawmakers. Maharlika — a word originally meaning warrior class — is a likely reference to one of the myths created by the late dictator Marcos Sr., who claimed he led a guerilla unit called "Maharlika" during the Japanese Occupation.

Explaining the intentions of Maharlika, Romualdez said the fund would provide an "opportunity to ensure their respective funds’ optimal asset allocation as well as ensure that resources are efficiently channeled to investments that will provide the most value not only to the participating GFIs (government financial institutions) but also to the country."

If enacted, the bill would order state pension funds Government Service Insurance System and the Social Security System, as well as state-owned lenders Land Bank of the Philippines and the Development Bank of the Philippines to provide an initial investment of P200 billion to Maharlika.

Separately, the government will inject P25 billion to Maharlika, while the Bangko Sentral ng Pilipinas and the Philippine Amusement and Gaming Corp. — the gambling and casino regulator — will also contribute to the fund.

Romualdez said Maharlika could also be used to manage the country’s foreign reserves and bring in job-generating direct investments, citing the success stories of Singapore's GIC and the Indonesia Investment Authority.

But while the move had been a hit in other countries, there were also cautionary tales of misuse of such funds. At the same time, analysts stressed the importance of creating such funds at the right time and in the right economic conditions.

A ‘hard sell’

A government with surplus cash and resources can create a sovereign wealth fund. Simply put, such funds can serve as an instrument for a state to invest and raise revenues, while also attracting firm investments.

However, this is not the case in the Philippines now. 

While the economy managed to crush expectations of a slowdown after growing 7.6% in the third quarter, a brutally high inflation has been squeezing Filipino families’ budgets for months. At the same time, a narrow fiscal space is crimping much-needed state spending on programs meant to meet the country’s post-pandemic needs.

READ: Filipinos unhappy with Marcos' handling of inflation problem — survey | Marcos sharpens focus on tax management, economic growth to cut debt

The country is also dealing with a dollar deficit, while its reserves have remained below $100 billion from July to October as the BSP moves to prop up a falling peso and amid a yawning trade gap.

There had been attempts in the past to establish a state-backed wealth fund in the Philippines. Former Sen. Paolo Benigno “Bam” Aquino filed Senate Bill 1212 that sought to form a sovereign wealth fund in October 2016. Over a year later, Sen. Joseph Victor “JV” Ejercito filed similar legislation in March 2018.

So far, things are going well for the new proposal. A day after Romualdez filed the measure, the House committee on banks and financial intermediaries approved the bill "in principle" last Tuesday.

The House committee on ways and means will scrutinize the tax provisions of the measure, while the appropriations panel will study the budgetary matters of the bill. Finance Secretary Benjamin Diokno said Marcos himself greenlit the plan.

READ: Government financial bodies back bill creating sovereign wealth fund

But Danilo Lorenzo Delos Santos, a professor at the Department of Political Science and Development Studies of De La Salle University in Manila, believes that setting up a sovereign wealth fund could be a "hard sell" at the moment due to its timing.

"It just doesn't fit the current puzzle we have that need to be prioritized such as that of post-pandemic recovery which, I think, will dominate and will be the proverbial measuring stick and probable legacy of the current Marcos administration," Delos Santos said in an interview.

"In a time of crisis, expansive policies should take a backseat to policies that seek to stabilize and seek recovery than lofty plans that may look good on paper but don't fit the overall need and economic narrative," he added.

Delos Santos warned that the capacity of key agencies working in social welfare and services would be affected if their money, which are sourced from pension fund members and bank deposits, would be funneled elsewhere at a time of economic distress and extreme risk aversion among investors.

"A sovereign wealth fund will enable the country to invest in other baskets of investments that could be high yielding, but (it) also come(s) with added risks," he said.

A possible source of corruption?

In other countries, sovereign wealth funds have ended up lining the pockets of government officials. In 2020, former Malaysian Prime Minister Najib Razak was found guilty of looting billions from a state investment fund, in what may be one of the largest financial scandals in history.

Dr. Eric Vincent Batalla, a political science and development studies professor at DLSU, said it is equally important to carefully choose the individuals that would be tasked to manage Maharlika, and to put in place mechanisms that would ensure efficient and effective management of the fund.

"Of course, our legislators and the general public should closely scrutinize the sources, uses, expected returns, and other design features of the fund," Batalla, who has done various research on Philippine corruption and public policy, said in a separate interview.

"Given the weak institutions and accountability mechanisms, as well as the presence of opportunistic agents in and out of government, there are always potential problems that can cause serious economic and political repercussions," he added.

FROM BUSINESSWORLD: ‘Historic low’: PHL slumps in anti-corruption index

The bill’s explanatory note said Maharlika will have in place "a transparent and sound governance structure that provides adequate operational controls, risk management and commitment".

For businessmen, the devil is in the details.

"For now, we’re monitoring it. We’re learning more, we don’t have many details yet. It’s a big issue with few details on the table," Lars Wittig, president of the European Chamber of Commerce of the Philippines, told journalists at an event organized by the Joint Foreign Chambers on Thursday.

At home, there have been rumors that such a fund would be used as a vehicle to discreetly repatriate the Marcoses' ill-gotten wealth offshore.

The family patriarch and his wife, Imelda, plundered billions of dollars from state coffers during their two-decade rule, triggering a massive hunt for the fortune following the collapse of the dictatorship.

DLSU’s Delos Santos, who is also an expert in anti-money laundering and economic crimes, said the government could disprove the rumors by "proving itself worthy of the trust and taxes of the people" and watching out for shell companies, hot money, cronyism and other sources of illicit funds that could use Maharlika to finance terrorism or organized crimes.

"We have to make sure that the legal system is ready, able, and given full capacity to enforce full transparency and accountability, not only within our state but as well as our networks with other banking legal systems in combating transnational white collar crimes," he said.

"If the (sovereign wealth fund) is implemented without airtight legal structures in place, and the necessary capacity and implementation measures, it may just be the nightmare everyone has expected it to be," he added. — with a report from Ramon Royandoyan

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