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Business

Ill-premised and railroaded wealth fund

BIZLINKS - Rey Gamboa - The Philippine Star

Now is not the time to create a sovereign wealth fund (SWF), more so, to pass a law creating the proposed Maharlika Wealth Fund (MWF).

There is a deluge of negative reactions from government and private company employees against the use of pension funds for the MWF, mainly on trust and risk issues, although these are not the only reasons why a MWF is not desirable now.

Bear with me as I to go through the hard issues first.

SWFs are often made up of excess monies of countries pooled together with the intention of generating more funds. These are often sourced from excess foreign exchange reserves, excess income from natural reserves like oil or from excess tax revenues.

I over emphasize the word “excess” in the above paragraph to dramatize the incongruity of House Bill 6398 that seeks to establish the MWF. The bill proposes to set aside P125 billion from the Government Service Insurance System (GSIS) and P50 billion from the Social Security System (SSS), which together would be the largest block of the earmarked P250 billion starting money.

Government employees may care less about the risk of not getting their monthly pensions because they know that the MWF, if mismanaged, will be “rescued” by government.

The reality, however, is that an infusion of capital to the GSIS should the MWF go bust would have to be paid over time given the existing tight monetary condition of government in collecting enough taxes to fund its yearly budgets.

Risky proposition

Private sector employees who contribute their hard-earned earnings monthly to the SSS, however, do not enjoy the same assurance. It is well known how the SSS continues to struggle to ensure its long-term survival.

In fact, SSS pensioners today are still waiting for the second tranche of their promised pension increase, which was supposed to have been paid out in 2019, but had to be deferred when the SSS could not implement a planned member contribution hike because of the pandemic.

Definitely, both the GSIS and SSS are not in a condition where a bad turn in the management of the MWF can be shrugged off. The risk of triggering another “EDSA revolution” by 43 million government and private sector employees and retirees is very real.

A SWF built on the instability of pension funds is not only a risky proposition, but a dangerous one.

No surplus foreign reserves

HB 6398 also seeks annual contributions from the Bangko Sentral ng Pilipinas’ foreign currency reserves equivalent to 10 percent of remittances of overseas Filipino workers (OFWs) and 10 percent of the annual contribution of business process outsourcing (BPOs).

BSP Governor Felipe Medalla has already openly expressed reluctance to the use of foreign reserves for the MWF. Our reserves are still in a precarious position and its vulnerability was recently tested to support a weak Philippine peso that was threatening to breach the P60 mark against the US dollar.

The Philippines definitely does not have excess foreign reserves sitting idle that can be moved to the MWF. In truth, some countries had to withdraw money from their foreign reserves-based SWF to fund COVID-19-related and economic reopening programs, presumably at a loss.

As with most countries, our central bank has existing programs designed to maximize the value of foreign reserve assets, taking into consideration risks that may require its use.

Although the current BSP now has enough safeguards to ensure prudent management of foreign reserves, many of these draw from lessons accumulated during the Marcos Sr. years when massive capital flight and insurmountable government debts prompted the International Monetary Fund to put the country under a receivership.

Use

Another concern I can raise about the MWF is its use. Apparently, in celebration of the country’s assumed ascension as an upper middle-income economy, administration allies at the House are convinced that now is the time to come up with a SWF that will invest in global financial instruments and projects.

We don’t need a public relations stunt on the global stage at this time when we are still not there. Such premature moves may end up as egg on the face instead of being President Marcos’ legacy.

Furthermore, current global financial conditions are still shaky, what with threats of recession happening in developed economies, high oil prices resulting from a growing shift to non-renewables, and global supply chains still trying to find normalcy.

More importantly, the money accumulated in the MWF can be better put to use for domestic projects. What needs to be done is to improve the mechanisms that govern lending to micro, small, and medium-sized enterprises that need all the help they can get to expand operations and create more jobs.

Corruption

The soft issues deal with concerns on possible corruption, primarily reinforced by the sponsorship of HB 6398 by the President’s cousin, Martin Romualdez, and his son, Sandro Marcos. The assurance of a speedy passage of the bill by several House committees also smacks of railroading, which more often connotes the absence of prudent deliberation.

Crucial to a credible SWF management will be the people assigned to oversee it, and unfortunately, naming the President as the chairman of the MWF Corporation and declaring that he has “green lighted” the house bill does not provide a comfortable level of assurance.

Finally, mentioning adherence to the Santiago Principles is also not a guarantee of good governance. The Santiago Principles promote transparency, good governance, accountability and prudent investment practices while encouraging a more open dialogue and deeper understanding of SWF activities.Majority of SWFs sworn to the Santiago Principles are delinquent in reporting or fully disclosing their activities, often exhibiting problems too late.

Facebook and Twitter

We are actively using two social networking websites to reach out more often and even interact with and engage our readers, friends and colleagues in the various areas of interest that I tackle in my column. Please like us on www.facebook.com/ReyGamboa and follow us on www.twitter.com/ReyGamboa.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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