PHL not ready for sovereign wealth fund — analysts

Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINES is not ready for a sovereign wealth fund amid the lack of fiscal space and high debt levels, as well as concerns over possible mishandling of public funds, analysts said.

“At this point in time, the country is not in a position to set up a sovereign wealth fund given the government’s tight fiscal position and large debt-to-gross-domestic product (GDP) ratio. Furthermore, the government doesn’t enjoy any fiscal bonanza from a commodity price boom, such as minerals or oil,” Calixto V. Chikiamco, Foundation for Economic Freedom (FEF) president, said in a Viber message.

Several lawmakers led by House Speaker Ferdinand Martin G. Romualdez, a cousin of President Ferdinand R. Marcos, Jr., and Deputy Majority Leader Ferdinand Alexander Marcos, the President’s son, recently filed a bill seeking to create a sovereign wealth fund.

The proposed Maharlika Wealth Fund will make investments by utilizing funds from the Government Service Insurance System (GSIS), the Social Security System (SSS), Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP).

The sovereign wealth fund will get an initial investment of P250 billion from these state pension funds and banks.

Mr. Chikiamco said it will be risky to use pension funds, which are typically managed conservatively, for a sovereign wealth fund.

“There is no value added to create another separate entity to invest the funds of SSS and GSIS. The pension funds have investment committees that invest the money prudently on behalf of its members. If the idea is to generate higher returns, it may come at higher risk, which is not within the investment guidelines for the investment of pension funds,” he said.

“It may also be politically reckless for them to touch SSS funds, which are owned by its members and not the government,” he added.

Terry L. Ridon, a public investment analyst and convenor of think tank InfraWatch PH, said in an e-mail that pension funds are held in trust for the benefit of its members, not the government.

“Relying mainly on pension funds and government banks which already have their own investment objectives, timelines and risk tolerances subjects the pensions and deposits of ordinary families to extraordinary risk. Retirees and depositors did not sign up to subject their money to this new type of risk,” he added.

A sovereign wealth fund is typically funded by a government’s oil or other commodity export revenue or excess foreign exchange reserves.

“We have no oil, we have limited natural gas and the current revenue-sharing framework on mining does not favor the government,” Mr. Ridon said, adding that the Philippines does not have any surplus government funds.

The National Government’s (NG) budget deficit stood at P1.11 trillion in the January-to-October period, accounting for just 67% of the P1.7-trillion deficit program for the full year. The government borrows from local and external sources to help fund a budget deficit.

The NG outstanding debt hit a record P13.52 trillion as of end-September, bringing the debt-to-GDP ratio to a 17-year high of 63.7%.

OBJECTIONS
Under the proposed bill, subsequent contributions to the Maharlika Investment Fund (MIF) would come from other government institutions, including the BSP. The bill requires the BSP to provide funds equivalent to 10% of remittances from overseas Filipino workers (OFWs), 10% coming from the annual contribution of the business processing outsourcing (BPO) sector.

“If they say we will take the central bank’s dollars…we will have less ammunition the next time there is international volatility,” BSP Governor Felipe M. Medalla said in an interview with Bloomberg TV on Friday.

BSP data showed gross international reserves, which serves as a buffer for liquidity shocks, stood at $94.1 billion as of end-October — the lowest in two years.

Mr. Medalla also said transparency over the governance of the MIF will be crucial, citing the experience of 1Malaysia Development Berhad (1MDB).

Malaysia’s 1MDB raised billions of dollars from bond issuances to be spent for projects, but over $4.5 billion were allegedly misappropriated by key officials.

Analysts also noted widespread opposition to the MIF is due to a lack of trust in the government, which has been hounded by corruption issues in recent years.

“My bigger objection is that no amount of so-called ‘good governance’ principles or independent directors can insulate the MIF from being mismanaged or pillaged given the lack of a rule of law in this country. If big-time crooks aren’t sent to jail, there is a risk that those managing the fund may think they can get away with it,” Mr. Chikiamco said.

Maria Ela L. Atienza, who teaches political science at the University of the Philippines, said a sovereign fund requires “clear and democratic decision making, transparency and accountability.”

“The people who will be responsible for the funds need to be both good managers and accountable,” she said.

Under the bill, the Maharlika Wealth Fund Corp., the state corporation that will manage the fund, will be chaired by Mr. Marcos.

“It is imperative that there are sufficient guarantees through strong mechanisms of transparency and oversight in efforts to push for the use of public funds for investment purposes,” Francisco A. Magno, who teaches political science and development studies at the De La Salle University, said in a Messenger chat.

Mr. Ridon also noted the fund’s leadership structure can potentially allow “political interference” by various financial institutions to lobby for politicians and investment priorities.

“In its place, a Philippine sovereign wealth fund should institute a leadership structure composed of independent finance professionals compensated based on fund performance. This ensures that the fund is free from political interference and fund performance is the most important bottom line,” Mr. Ridon added.

Antonio A. Ligon, a law and business professor at De La Salle University, said that safeguards must be put in place to prevent mismanagement.

“Strict accounting internal control should be set in place,” he said, adding that caution should be exercised before putting resources in the MIF.

Mr. Ligon also recommended that a trial period be implemented to evaluate the viability and profitability of the fund to its beneficiaries.

Under the bill, the proposed fund shall adhere to the Santiago Principles to “ensure transparency and accountability.”

The Santiago Principles are a set of 24 best practices for sovereign wealth funds established by the International Forum of Sovereign Wealth Funds.

John Paolo R. Rivera, an economist at the Asian Institute of Management, said that the government should focus on raising funds through the private sector instead of a sovereign wealth fund.

“The role of the private sector is also critical because they’re the ones that have surplus funds. Like I mentioned earlier, most economies invest their surplus funds into their sovereign fund because they want to expand their liquidity further and faster, so the role of the private sector is very important because they are the ones who have surplus funds,” Mr. Rivera told BusinessWorld Live on Thursday. — with Kyle Aristophere T. Atienza