Business, think tanks reject planned Maharlika Wealth Fund

Published December 5, 2022, 4:51 PM

by Bernie Cahiles-Magkilat

Various business and think tank groups have strongly opposed the planned Maharlika Wealth Fund (MWF), a Philippine government version of a Sovereign Wealth Fund (SWF), stating the proposal under House Bill 6398 will not amount to wealth creation but instead puts at risk peoples’ pension money in a fund filled with “infirmities”.

In a strongly-worded statement of concern, 12 business and think tank groups such as the Foundation for Economic Freedom (FEF), Competitive Currency Forum (CCF), Filipina CEO Circle (FCC), Financial Executives Institute of The Philippines (FINEX), Institute of Corporate Directors (ICD), Integrity Initiative, Inc. (II, INC.), Makati Business Club (MBC), Management Association of The Philippines (MAP), Movement for Good Governance (MGG), Philippine Women’s Economic Network (PHILWEN), UP School of Economics Alumni Association (UPSEAA), and Women’s Business Council Philippines, Inc. (WOMENBIZPH) have called for fiscal prudence as they rejected House Bill No. 6398 seeking for the creation of the SWF.

In a separate statement, the Philippine Chamber of Commerce and Industry (PCCI) also called for prudence and suggested to put the proposal in the back burner as financing has come under fire plus the uncertainty in the financial market due to geopolitical concern and the recent crypto currency fiasco. “Our government must make due diligence that such action will not affect our presently good credit standing which provides us lower foreign loans,” PCCI President George Barcelon said.

Proponents of the bill are House Speaker Martin Romualdez and Senior Deputy Speaker Ilocos Rep. Ferdinand Alexander “Sandro” Marcos, cousin and son of President Ferdinand Marcos Jr., respectively. Albay Representative Joey Salceda, who chairs the House ways and means committee, is also a strong defender of the measure.

In the joint statement, the 12 business and think tank groups said: “We register our serious concerns and reservations against the proposed MWF on the principles of fiscal prudence, additionality, solvency of social pension funds, contingent liabilities, monetary independence of the Bangko Sentral ng Pilipinas (BSP), government in the economy, and transparency.”

Mainly, the groups explained that successful SWFs in other countries are either commodity-based or non-commodity based. Commodity-based SWFs are designed to optimally manage the windfall from the appropriate disposition of their natural resources for the benefit of future generations. Non-commodity-based SWFs are designed to manage the accumulated foreign assets from persistent external trade surpluses and surpluses of state-owned enterprises (SOEs) with the objectives of preserving the value of their capital and realizing returns on investments in order to keep the long-term sustainability of the fund.

In contrast, the groups said, the Philippines has neither commodity-based surpluses nor surpluses from external trade and SOEs.

The proposed P275-billion Maharlika is supposed to be funded by people’s pension money in the Government Service Insurance System (GSIS), Social Security System (SSS) and government financial institutions Land Bank of the Philippines (LBP) and Development Bank of the Philippines (LBP).

“There is no need, or even justification, to pool the reserves of government financial institutions (GFIs) and pension funds into larger amounts in order to earn higher returns,” the business groups said.

Requiring the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) to fund the SWF on the ground that they invest in government securities is in no way a creation of wealth. The LBP and DBP deposits exist because of the requirement for GOCCs to deposit their funds in government financial institutions.

“Hence, there is no creation of wealth, or generation of new deposits, but mere round tripping, when funds of the LBP and DBP are diverted to the SWF,” the statement added.

Further, the business groups said it is not appropriate to use the retirement funds of GSIS and SSS members and expose the fund to additional market and performance risks.

“Pension funds are intended to pay for pension liabilities, benefits, salary, and housing loans of their members,” the groups added.

The groups reminded the Maharlika proponents that the primary objective of the respective Investment Funds of the GSIS and SSS is therefore capital preservation with sufficient returns which demands conservative investment strategies. Currently, these strategies are properly being implemented. Therefore, there is no reason for diverting some of the funds of the GSIS and SSS to an SWF as it would simply expose the members’ retirement funds to investments in assets with additional market risks and performance risks.

As it is, the actuarial life of the GSIS and SSS at present is around 40-43 years, which is far below the ideal 70 years which is the international standard for an actuarially “infinite” life. Should a portion of their investment funds be diverted to an SWF, their actuarial lives will likely be shortened further, because the funds will be invested in higher risk assets.

The groups also question the bill’s provision requiring the Bangko Sentral ng Pilipinas to contribute 50 percent of its cash dividends to the national government is problematic in many aspects.

“This is a direct assault on the constitutional mandate of the BSP as an independent central bank in promoting price stability and managing exchange rate volatilities,” the statement added.

Proponents were also reminded that even supposedly professionally-run SWFs such as Temasek has incurred large losses from bad decisions. The case of the losses of the Malaysian SWF 1Malaysia Development Berhad (1MDB) due to corruption are well known.

Instead of the SWF, the business and think tank groups suggested that the executive and legislative branches continue to implement existing initiatives to strengthen the areas of transportation, public health, education and infrastructure, especially digital and agriculture, that can boost productivity and lower inflation.

“These initiatives can be executed within existing legal framework, without resorting to an untested approach with many potential infirmities,” the statement concluded.