THE proposed Maharlika Investment Fund (MIF) encountered much opposition at the Senate on Wednesday as minority senators and local economists expressed their misgivings on the creation of the proposed sovereign wealth fund.
The Senate minority exposed what it called serious gaps in the bill creating the MIF, with Minority Leader Aquilino Koko Pimentel III repeatedly expressing hope that “the bill in its current form” will not be approved.
Local economists, meanwhile, expressed their fears that should the state mandate government financial institutions (GFIs) to finance the MIF, this could lead to an economic contagion that would endanger the banking sector and compromise the Bangko Sentral ng Pilipinas (BSP).
Pimentel aired his views at the second hearing on Senate bills creating the country’s first sovereign wealth fund, along with House Bill No. 6608—whose approval on third and final reading in the House has been questioned in the Supreme Court.
Pimentel lamented that at the rate they were replying to senators’ queries, the economic managers do not have a coherent idea for the entire MIF concept, thus turning the hearing into “one expensive public brainstorming.”
Senator Mark Villar, chair of the lead Banks and Financial Institutions committee jointly hearing the MIF measure with three other committees, took note of Pimentel’s concerns and assured the body all the issues raised in the hearings will be thoroughly addressed.
For her part, Sen. Nancy Binay asked officials of the Bureau of Treasury (BTr) if there is a business plan for the proposed MIF. Binay said it would be easier to persuade lawmakers to pass the measure if its proponents could provide them with the MIF business plan. “How can you envision a return when you don’t even know what is the specific developmental plan?” Binay asked. National Treasurer Rosalia De Leon, in response, told the committee that they are currently working on the proposed sovereign wealth fund and that there would be an investment strategy and risk management strategy.
‘Too big to fail’
At the hearing, Foundation of Economic Freedom (FEF) President Calixto Chikiamco said if investments of GFIs such as the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) in the MIF are guaranteed, this would be tantamount to a moral hazard that can serve as an “incentive for the parties to be reckless.”
“With its ability to access guaranteed loans from the GFI and perpetual funding from the BSP, the MIF will become ‘too big to fail’ and pose systemic risk to the economy,” Chikiamco said in a presentation on Wednesday.
This moral hazard, Chikiamco explained, has led to financial crises such as the 1997 Asian Financial Crisis (AFC) and the 2008 US Financial Crisis which eventually led to the Global Financial Crisis (GFC).
The 1997 AFC happened when companies assumed that central banks will protect the exchange rate. Knowing this, companies increased their borrowings of dollars.
Meanwhile, Chikiamco explained that the 2008 US financial crisis happened when big banks were initially thought to be “too big to fail.” This created a contagion that spread worldwide.
“The MIF is highly questionable as a strategy to achieve the government’s stated objectives. This is due to the fundamental flaw that funding of the MIF will not come from significant surpluses from commodity earnings or government operating results,” the FEF, Management Association of the Philippines (MAP) and the UP School of Economics Alumni Association (UPSEAA) said in a joint statement.
“Giving the GFIs a statutory guarantee for its lendings to the MIF will open the sizable liquidity of the LBP and the DBP. However, it creates no incentive for diligence, since the risk is passed as a contingent liability entirely to the NG [national government],” they added.
The FEF, MAP, and UPSEAA also said that sourcing financing for the MIF through the BSP would also amend the central bank’s mandate, particularly in promoting monetary stability.
Obtaining MIF funds from BSP, the economists said, would deprive it of its ability to manage liquidity and inflation as well as help distressed financial institutions. It will also compromise the BSP’s autonomy and independence.
“The BSP has consistently been viewed as among our most effective and trusted institutions, which has been key to our economic stability. The MIF could put such effectiveness and trust at risk,” FEF, MAP, and UPSEAA said.
“Weakening the BSP will reduce its ability to fulfill its primary purposes, and relying on the BSP’s dividends will engender systemic risks,” they also said.
Tap other sources
But if the government is bent on creating such a fund, the FEF recommended that raising funds for the MIF should be done through revenues earned by the government from its privatization efforts.
Chikiamco said the government’s plans to privatize the Philippine Amusement and Gaming Corporation (Pagcor), the Ninoy Aquino International Airport (NAIA), and the privatization of the Muntinlupa property of the Bureau of Corrections, among others.
In earlier hearings, Finance Secretary Benjamin Diokno had said that proponents have a viable list of assets for sale or privatization which can be tapped to seed the MIF.
GFIs questioned
Also at Wednesday’s hearing, Senator Sherwin Gatchalian called out the Land Bank of the Philippines for its readiness to plunk in P50 billion of its investible fund to seed the MIF, when, he noted, most or “95 percent” of the LBP’s investments were in government securities, among others, indicating it was “risk-averse.” Gatchalian asked LandBank whether the state depository bank consider such a risky investment in a still untested vehicle like the Maharlika fund?
LBP president and CEO Cecilia Borromeo earlier allayed concern by the Foundation for Economic Freedom that there will be “opportunity cost” for government financial institutions like LBP and DBP because funds that could have been used to lend to farmers, for instance, would be invested instead in MIF.
Villar asked her to address this question, and Borromeo assured the senator that the P50 billion that LBP will pour into the proposed MIF is “part of our investible funds,” or money that is “net of the loans we give to clients.” She noted that in all, LBP has P1.3 trillion in investible funds, so putting P50 billion into MIF does not constitute a major risk to stability nor will it represent an opportunity cost.
Also in the hearing held jointly with the Committees on Ways and Means, Government Enterprises, and of Finance, senators grilled central bank officials on their seeming flip-flop in earlier pressing Congress to help them shore up the capitalization of the Bangko Sentral ng Pilipinas (BSP), yet now see no problem in parting with BSP dividends, thus delaying the capital buildup plan.
Senators Sherwin Gatchalian and Nancy Binay raised this matter of delaying the capital buildup. However, Deputy Governor Francisco Dakila Jr. explained that there will only be a “slight delay” in the capitalization program and this will not weaken the BSP’s ability to respond to occasions when it is mandated to intervene. Moreover, under RA 7653, the BSP is already mandated to remit portions of its dividends to the national government. Thus, “essentially, the dividends belong to the national government.”
Congress has the power to legislate allocation of dividends accruing to the national government, he added.
Options
The local economists recommended that instead of the creation of the MIF, the government should explore the creation of other organizations that would boost the agriculture sector and/or help the country combat climate change.
A development financial institution such as the National Development Corporation, which helped in the lease of tracts of land for the banana and pineapple industries, should be looked at. The FEF also said the MIF can be structured as a green investment fund.
In his proposal, FEF co-Founder and Vice-chairman Romeo Bernardo said the MIF could become the Maharlika Green or Climate Investment Fund which can source financing from domestic and foreign investors for projects that will help the country meet its climate targets.
In January, the President announced that private money may be used for the proposed MIF, but gave assurances that safeguards will be in place so it cannot be used for money laundering.
Marcos made the remarks amid concerns by some lawmakers that the MIF can be misused or could drain the government of much-needed funds.
He said the use of the fund will be project-specific to ensure it will be properly used.
During the interview, he also explained that the MIF, which will be created via a new law, will only serve as “seed fund” for the country’s sovereign wealth fund.
The President also stressed that he is lukewarm to the proposal made during the 2023 World Economic Forum last week that funds from government-owned and -controlled corporations (GOCCs) be used to finance the MIF.