A disaster waiting to happen

In the first general membership meeting of the Financial Executives Association of Cebu, the main speaker was retired Banko Sentral ng Pilipinas (BSP) deputy governor Diwa Gunigundo. A UP Economics graduate with a master’s degree in the London School of Economics, and decades of teaching/working experience most of them in the BSP. He is more than qualified to talk about the proposed Philippine’s sovereign wealth fund which is now called the Maharlika Investment Fund (MIF).

The MIF bill was passed in the lower house last January and is now awaiting a counterpart bill in the Senate, and then to the bicameral conference committee. Due to the haphazard drafting/railroading of the MIF bill, it has already been revised three times by removing the unconstitutional, illegal, and highly-questionable provisions, among them the use of the GSIS and the SSS funds which cannot be done. The bill as forwarded to the Senate is still very objectionable and dangerous and Gunigundo discussed the issues. I have summarized below the major points.

A fundamental/basic flaw of the proposed MIF is the source of funding. Sovereign wealth funds in all countries are initially funded from windfall revenues coming from sales/exports of minerals like oil/gas and other mining products, or from sales/privatization of public assets, or from large fiscal surpluses. The Philippines doesn’t have any of these. The government is in a fiscal deficit of ?1.2 trillion in 2022, and is ?13.4 billion in debt as of February 2023. We also are in a trade deficit as our imports (including fuel oil) have exceeded our exports for so many years, in the $4 billion to $7 billion a year. The proceeds from privatization in previous years have already been used to cover budget shortfall.

The remaining proposed sources of the MIF funds which will be government financial institutions like DBP, Land Bank, and BSP dividends, while possible could imperil the financial health of these institutions and result in overall financial instability and a bank run. The BSP needs to shore up its capital to ?200 billion and is still short by ?90 billion, and the DBP and Land Bank need more funds to lend. Moreover, mandating these government financial institutions to fund the MIF will need regulatory exemptions that shouldn’t be given to institutions with public/private deposits. The use of BSP funds may even violate the constitutional guarantee of BSP autonomy.

Another highly-objectionable provision in the MIF is its exemption from the GOCC Governance Law, Government Procurement Law, Salary Standardization Law, and the payment of taxes and custom duties. These laws ensure adherence to good governance, and exempting the MIF from these laws gives it blanket authority to abuse. Without good governance, audit, and accountability, sovereign wealth funds are prone to mismanagement like in the Ecuador, Nauru, and Tonga funds which were all eventually abolished. Malaysia’s 1MDB wealth fund, which lost billions of dollars due to corruption and mismanagement, is another bad example.

The advantages cited by MIF proponents like attracting foreign investments, better returns on investments, and job creation are actually already being done by the existing institutions. The creation of the MIF is just going to be a costly duplication that will benefit the politicians and the appointees managing it.

Given, the current volatile/difficult economic and financial environment in the world and the Philippines, including the closure of Silicon Valley Bank, Signature Bank in the US and the troubles of First Republic and Credit Suisse, it would be foolhardy for the Philippine government to launch the MIF at this time. The global stock markets are on a downtrend, the bond market is in disarray, and inflation is yet untamed. The MIF is just another costly undertaking of the government, a disaster waiting to happen for the country, the people, and even for BBM.