BSP can handle loss of dividends for MIF -- Medalla

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the central bank is comfortably on a positive financial condition to let go of its profits in favor of the Marcos government’s Maharlika Investment Fund (MIF) for which the central bank will contribute 100 percent of its declared dividends in the first two years of the wealth fund.

“This postpones the buildup of the capitalization of the BSP but at this point, the balance sheet (of the BSP) is quite good and we could easily take the postponement,” Medalla told a Senate public hearing on Wednesday, Feb. 1.

BSP Governor Felipe M. Medalla

Under the revised New Central Bank Act, amended in 2019, the BSP has a higher capitalization of P200 billion versus its old 1993 charter which only allowed for P50 billion. The new BSP law, however, states that the additional P150 billion will come from its own dividends. Since the proposed MIF law will divert these dividends, the BSP will continue to have to work on a mere P50-billion capitalization until it is freed by the wealth fund.

Medalla also told the Senate Committee on Banks, Financial Institutions and Currencies that the BSP is prepared to provide the two government-owned banks Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP), which will contribute to the MIF and also part of the Maharlika Investment Corp. (MIC) to be created, the necessary regulatory relief measures if or when needed.

National Treasurer Rosalia V. De Leon, when she presented the government’s plan of sourcing for the MIF requirements, reiterated that DBP will initially contribute P50 billion while Landbank will put in P25 billion.

The government financial institutions (GFIs), including BSP, will fund the MIC which will mobilize and utilize the investment fund to maximize returns. The GFIs will later increase their contributions to the MIC.

To make sure the two GIFs will not collapse due to unforeseen events in the future, De Leon said the BSP will extend regulatory relief measures for their continued financial soundness while contributing to the fund.

Meanwhile, the BSP for the first two years of the MIF or MIC will remit 100 percent of its declared dividends to the fund. In the succeeding years, the BSP will remit 50 percent of its declared dividends to the fund while the remaining 50 percent will go to National Government until the increase in the BSP capitalization has been fully paid. Thereafter, the BSP will remit 100 percent of its declared dividends to the fund.

Medalla said the BSP will back up Senate Bill No. 1670 or the Maharlika Investment Fund Act, for the establishment of an independent fund that “adheres to the principles of good governance, accountability and promotes economic development”.

“We support the provisions that explicitly mentions the BSP, in particular the contribution that the dividends declared by BSP (and) how the dividends will be disposed of and then going to the sovereign wealth fund,” said the BSP chief.

Medalla assured the Senate that BSP also support the provisions that say the central bank may extend regulatory relief to Landbank and DBP.

“Some critics may say that it gives undue advantage to Landbank and DBP relative to private banks but one must be aware too that Landbank and DBP are also quite restricted by their mandates and don’t really directly compete very much with the private banks. So we do not see that as a major competition problem,” said Medalla.

He said the BSP “believes that this measure (MIF law) requires a whole of government approach, great focus, and proper implementation to achieve its objectives. Rest assured that BSP will steadfastly fulfill its role in delivering its mandates.”

Previously, when the wealth fund was first being discussed in the Lower House, Medalla was cautious about early proposals of tapping the country’s US dollar reserves to fund the MIF.

Medalla was worried that diverting the gross international reserves will seriously hamper their defense of the peso in case of external shocks or hits to the peso, as what happened in 2022 when the local currency depreciated to its record weakest of P59 vis-à-vis the US dollar. The BSP sold more than $13-14 billion of its dollar stock to stop the peso from breaking past P60.

Medalla also said the BSP is not an investor of the wealth fund since the dividends paid by the BSP belongs to the government anyway. Therefore, it is the government that is investing in the fund, not the BSP.

Based on the amended 2019 BSP law, the central bank is authorized to recapitalize to P200 billion but this will be funded solely from the declared dividends of the central bank.

Since 2020, at the onset of the Covid-19 pandemic, the BSP has been remitting its dividends to the government to help in financing the pandemic response even though it was no longer required to do so under its revised charter. With the current version of the MIF, it will take some time until the BSP is able to have its P200 billion capitalization.

As of end-October 2022, BSP reported profits of P87.92 billion, up 37.68 percent from same period in 2021 of P63.86 billion.

The BSP’s total assets however declined to P7.314 trillion or down by 8.7 percent from same time in 2021 of P8.013 trillion. Bulk of these assets are BSP’s international reserves which have been depleted due to BSP’s dollar selling to prop up the peso. The country’s reserves as of end-2022 stood at $96 billion versus end-2021 of $108.8 billion.

BSP liabilities totalled P7.228 trillion which was 8.2 percent lower from P7.877 trillion in 2021. Liabilities are deposits such as the term deposit facility and the overnight deposit facility, and currency issues.

Meanwhile, BSP’s net worth amounted to P85.35 billion as of end-October compared to P135.58 billion in 2021, or down by 37 percent due to reduced surplus and capital reserves.

The BSP’s surplus or reserves fell to P35.35 billion during the period, down by 58.7 percent from P85.58 billion.

The BSP fought to have a higher capitalization since its original P50 billion capital was based on the size of the economy in 1993, when the New Central Bank Act was enacted. One of the reasons for raising the capitalization to P200 billion was to address the lack of burden sharing between the BSP and the government when it comes to losses.