Calixto V. Chikiamco
I was discussing the recently approved third reading version of House Bill No. 6088 “Establishing the Maharlika Investment Fund, Providing for the Management, Investment, and Use of the Proceeds of the Fund, and Appropriating Funds Therefor,” the supposedly revised, “clean,” and upgraded version of the bill submitted by the economic managers, with some friends from the Foundation for Economic Freedom.
My friends’ conclusion is that the revisions, such as removing the Social Security System and Government Service Insurance System (SSS and GSIS) as funding contributors and reinstating legal review by the Office of Government Corporate Counsel, don’t fundamentally alter our objections to the creation of the Fund on the principles of fiscal prudence, additionality, Bangko Sentral ng Pilipinas (BSP) independence, and role of government in the economy. In other words, there’s no fiscal surplus to manage and no need for another institution to do what the Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP) are doing now. It will also weaken and compromise the BSP and strengthen the role of government in the economy where it has a record of failures and mismanagement.
As one of them quaintly put it, those revisions are just like “putting lipstick on a pig.”
I told my friends, however, that no matter how solid are their arguments, the politicians won’t listen to them. Politicians never listen to economic arguments. They think politically.
Proof, I said, is that after widespread protests and objections, the Congressmen removed the SSS and GSIS as funding sources. Not only did they remove them from the proposal, but codified the prohibition in Section 11: “Under no circumstance shall the GOCCs (government-owned or -controlled corporations) providing the social security of government employees, private sectors, workers and employees, and other sectors and subsectors, such as but not limited to the Government Service Insurance System, Social Security System, and Home Development Mutual Fund, be requested or required to contribute to the MIF. To protect the retirement and other social security benefits of their members, no part of the funds of said GOCCs shall accrue to the MIF.”
However, if we are to believe the cheerleaders and authors of the Maharlika Investment Fund (MIF), the MIF will yield fantastic returns, whether invested in infrastructure projects or in bonds and equities abroad. These returns are practically guaranteed, according to its supporters.
If that is so, then what’s the logic of excluding the SSS and GSIS members from participating in the supposed bonanza?
The answer is simple. It was politically toxic to be using SSS and GSIS funds. The Congressional retreat was due to political reasons. Politicians acting and thinking politically.
Those bright boys who came up with the MIF idea didn’t do their homework when they included the SSS and GSIS as major contributors to the Fund. There’s a reason why former President Ferdinand Marcos, Sr., for all his omnipotence, never touched SSS funds during his dictatorship. It was politically toxic and politically radioactive for him to have done so.
How do I know this? My driver, who hardly speaks to me about political matters, suddenly blurted out to me: Bakit nila pinakailaman ang aming pondo sa SSS? Pang-retirement namin ’yan. (Why are they using our funds in SSS? That’s for our retirement.)
I smiled because the incident confirmed to me what I knew all along. If the SSS and GSIS aren’t removed, the administration would burn in political hell early. It won’t be just employees like my driver who will loudly protest but also employers like the thousands of owners of micro-, small- and medium-sized enterprises (MSMEs) who contribute to the pension fund.
Therefore, the Congressmen turned to the hapless LANDBANK, DBP, and BSP to be the major contributors to the Fund. The question is, will this version be easy-peasy politically for the administration?
I contend that there will be a serious political cost to passing the MIF bill, the magnitude of which is dependent on the final version that’s passed into law and on the performance of the fund.
Where will the political cost come from?
It will come from the systemic risk that the MIF poses to the banking system in general and to the degradation of the banking regulator, BSP, as an independent and professionally run monetary authority.
How does the MIF pose a systemic risk to the banking system?
First, the capital which will be contributed represents 25% of the capital of LANDBANK and 33% of the capital of DBP. Any devaluation of the Fund, either through mismanagement, corruption, or just plain market timing and bad luck, will send shockwaves through the DBP and LANDBANK to the entire banking system. Don’t expect the rest of the banking system to remain unaffected if the two government financial institutions (GFIs), LANDBANK and DBP, become wobbly.
As former BSP Deputy Governor Diwa Guinigundo wrote: “Those behind the Maharlika bill may not realize it but they are undermining the financial system. If the GFIs fail because their funds are earmarked for Maharlika, it is likely that the other banks in the system could also catch fire. That will trigger contagion among the banks, especially those with shaky balance sheets following the two-year pandemic crisis.”
We must remember that the banking industry is sensitive to contagion. Savers sometimes act irrationally due to asymmetric information (savers don’t know what banks are doing with their money). It will be easy to spread negative rumors, especially since the MIF is a politically conceived and organized entity. Negative rumors, partly politically driven but with some basis in the MIF’s malperformance, can spread financial panic to the financial system.
Since the banking industry plays a vital role in the economy, matching savers with investors, the tremors in the industry will undermine macroeconomic stability.
Even assuming that the MIF is professionally run, it can’t insulate itself from market volatility. Reports state that all Sovereign Wealth Funds (SWFs), including the mighty Norwegian SWF, suffered market losses last year. Moreover, no stock is insulated from market volatility. Even a blue chip and professionally run PLDT saw its stock plummet by more than 20% when overspending on its capital budget was revealed. Because the MIF is essentially funded by debt from the banking system, its performance can transmit tremors to the entire banking industry.
Moreover, under the MIF, the BSP is a weaker and compromised institution in ensuring price and financial system stability. First, Section 11 mandates the BSP to give the financial institutions DBP and LB “regulatory relief.” This means that the BSP is supposed to look the other way when it comes to regulating DBP and LANDBANK but be strict with private banks. This creates a moral hazard.
Second, while it’s true that the country’s forex reserves won’t be used, the BSP is mandated to declare 100% of its cash dividends in the first two years of the Act to fund the MIF, effectively delaying the increased capitalization of the BSP as mandated by RA 7653 and further amended by RA 11211. In the succeeding fiscal years, BSP is required to remit 50% of its declared dividends to the Fund.
That the BSP will be used as a regular funding source for the MIF will undermine the mission and integrity of the monetary regulator. Income objectives, rather than price and exchange rate stability, will dominate BSP policy and regulations. There may come a time when the BSP loses money to defend the peso from appreciating too much (as had happened in 2012 when it lost billions) or when it must incur interest expenses to sterilize pesos used to buy dollars or when it does open market operations. But now under its new mandate to fund the MIF from its dividends, will it?
THE ERAP EXAMPLE
So what if the banking industry is at risk and the BSP is compromised, you say? Politicians hardly care if their own money isn’t at risk.
The oligarchs will care. They are heavily invested in the banking industry. Also, their non-bank companies’ financing depends on a stable and healthy financial system.
Let us recall the Estrada presidency and EDSA Dos. The oligarchs didn’t care a whit when former President “Erap” Estrada was pocketing money from jueteng, the illegal numbers game. They started caring, however, when Erap started intervening in the financial markets, facilitating the takeover of PLDT with the assistance of Mark Jimenez, and, more importantly, intervening in the merger between Equitable and PCI Bank. Those interventions in the financial markets on top of creating a port monopoly, criminal extortion, and other shenanigans alarmed the oligarchs. Thereafter, they seized the opportunity provided by Chavit Singson’s revelations about jueteng to have Erap impeached and ultimately deposed by people power under EDSA Dos.
The threats posed to the oligarchs by the crony capitalism of Erap will pale in comparison with the MIF. With its funding and its tax-free privileges, the MIF will become a financial behemoth. It can be used to threaten the oligarchs with a takeover or take substantial positions in their companies. Because it’s owned by the government and doesn’t have to pay taxes, whomever it chooses to partner with or bestow its favors on will have an undue advantage over whatever project it is involved in. Or, it can bail out cronies at inflated prices, but this will infuriate the non-cronies. With its financial firepower, it can be used to bully oligarchs and bend them to the will of the powers that be.
Furthermore, the country may get a ratings downgrade with the MIF. Under the bill, all debts of the MIF from the GFIs will be guaranteed by the National Government. This will tremendously increase the government’s contingent liability and may lead to a ratings downgrade. This will lead to increased borrowing costs for the government and private sector.
The political cost of the MIF is a less stable, rockier presidency.
There are political forces just waiting for President Bongbong Marcos (PBBM) to stumble and he may stumble badly with the MIF. There are the Yellow-leftist anti-Marcos diehards, waiting to launch another People Power revolt. They can still mobilize the urban professionals and the elite, as shown in the crowds that showed up at opposition candidate Leni Robredo’s rallies. There’s former President Rodrigo Roa Duterte, who is still extremely popular and who has never been comfortable with the candidacy of PBBM. With the MIF, PBBM will be tying his political fate to factors that will be beyond his control.
PBBM can’t rest easy just because he won handily. Campaigning is one thing, governing is another. His continuing failure to tackle food inflation will surely erode his lofty poll numbers. His handling of the police and military may seed discontent that can be used to destabilize him. More troubles may lie ahead but this will all pale in comparison should the MIF be misused or cause instability in the banking system.
His team isn’t thinking strategically. They could have conceptualized a different investment fund, perhaps funded by the privatization of the Philippine Amusement and Gaming Corp. (PAGCOR) or the sale of government prime properties such as the national penitentiary site in Muntinlupa or the land occupied by the NAIA 2 (Ninoy Aquino International Airport Terminal 2), with none of the risks to the financial system that the MIF will bring and with more flexibility for the political powers that control the fund.
The fall of former President Erap Estrada should serve as a cautionary tale to PBBM. Before PBBM, Erap enjoyed the largest electoral mandate and got afflicted with hubris. Like PBBM, Erap surrounded himself with technocrats but nobody dared speak truth to power. In the end, Erap behaved badly and made gross political miscalculations that eventually led to his downfall.
About the only presidential adviser speaking truth to power now is Presidential Legal Counsel Juan Ponce Enrile (JPE). He is a wizened and experienced politician-technocrat (He was Secretary of Finance and Commissioner of Customs at one time). He cautioned the President to review the MIF carefully. He says he does not want Marcos to be historically damaged, and even suggested that it is “safer” for the MIF to be created out of the general fund.
Yes, please, Mr. JPE, tell the President the MIF is not worth it politically.
(Note: Last Saturday, Rep. Joey Salceda indicated that Malacañang will endorse a radically different version of the MIF bill in the Senate, perhaps in recognition of the fundamental flaws of HB 6608. This, we must see.)
Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).