Shriveled

According to the latest update, Norway’s sovereign wealth fund is down $164 billion – nearly twice our nation’s outstanding foreign debt.

The loss may seem staggering; but it is not unusual. Investment houses and personal investment portfolios are mostly down in this bear market in the face of all the volatility afflicting the global financial market. In this bear market, we are all holding on to shriveled portfolios.

The paper loss carried by Norway’s sovereign wealth fund appears staggering only because of the size of that country’s fund. Norway has the largest sovereign wealth fund in the world, drawn from that small country’s fabulous oil incomes from its North Sea wells. This is truly a fund drawn from finite revenues to guarantee the prosperity of future generations.

Norway’s paper loss underscores the truism that in the world of investment finance, size does not automatically translate into profitability. Size merely enables an investment fund to hedge better and lower risks.

When the world transitions from the present bear market and enters into a bull run, Norway might be able to recover its present paper loss and even produce a profit. This is because Norway has a fund with a long investment horizon. This is why there are no demonstrations in the streets of Oslo demanding a parliamentary inquiry into the management of the country’s sovereign wealth fund. The parliamentarians do not necessarily know any better than the expert fund managers.

This brings us to the confusing discussion about the proposed Maharlika Investment Fund (MIF).

The MIF is conceptualized differently from the Norwegian fund in that it is not drawn from “excess” revenues – monies that the country could not productively use at present. We do not have such monies. We run our government on a deficit and are up to our necks in public debt.

In the first draft of this concept, the MIF was supposed to have been funded from contributions made by the GSIS, the SSS, the DBP, the LBP and “excess revenues” from the BSP (still a debatable concept). The BSP is still capital deficient and requires additional capital infusion from the national government.

Asked about contributing BSP revenues to the MIF, governor Felipe Medalla said our central bank could afford to postpone its capital build-up. That sounds grudging.

In the face of strong public opposition, the pension funds were removed from the list of donors. It might have been illegal to force them to contribute, anyway. The pension funds are not government money. These funds are owned by the members contributing hard-earned money for their retirement.

Lately, the DBP was removed from the list as well. This is understandable. The government bank has just received fresh capital infusion by way of the Bayanihan Law. Its capital adequacy ratio remains tight.  At any rate, the DBP lends to support the country’s infrastructure development – exactly as the MIF is supposed to do.

Nobody calls the MIF a “sovereign wealth fund” anymore – because it is not. The fund is not established to generate wealth for the future. It is now justified as a fund to “hasten” our infra modernization. This is what the DBP has been doing all along: processing official development assistance to support domestic industrialization.

Senate deliberations on the proposed MIF began yesterday. Already, tough questions (never heard in the House) are being raised.

Sen. Francis Escudero asked why the LBP, which is contributing half the fund, is given only one seat in the MIF board. This does not seem proportional.

Escudero also inquired why no rate of return for the money MIF, in effect, borrows from the LBP is specified in the bill. In the world of investment finance, of course, it would be foolhardy to specify a definite rate of return given all the vagaries. But the LBP management might need to be comforted by some promised rate of return or face inquiry later for why public money was lent out for free.

Perhaps this could be addressed by a provision that guarantees the LBP will be kept whole in the event the MIF loses money. But this will only dig deeper into the rabbit hole of government contingent liabilities, exposing us to a debt crisis.

Some of our economic managers have speculated the fund could be offered for private investments. But they do not answer why any institutional investor would hand over money to the MIF without guarantees they will be kept whole or any commitment to a rate of return that will enable the investors to justify their placement to their shareholders.

Investment finance is perhaps the most competitive sector there is. In order to thrive here, the MIF must demonstrate some inherent superiority in management and profitability. It has none, unless further down the road the fund is declared to be tax-free or something. But doing that will constitute an anomaly.

So, as things stand, we now know the MIF is not a sovereign wealth fund, properly speaking. It is transforming, under intense scrutiny, into some form of development fund to help us build infra. But that is already what DBP does with its current complement of experienced bankers.

The MIF is quickly shrinking as we talk about it. In the bill’s current form, this could not be capitalized at more than P100 billion. That is small. If we want rapid modernization of our infra, we need money in the scale of trillions.

The old way of raising that funding, borrowing from ODA sources, still seems cheaper – and simpler.