Diwa C. Guinigundo
(We are publishing the letter of former Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo to the senators on the Maharlika Investment Fund – Editor)
Honorable Senators of the Republic:
Thank you for allowing us to speak our minds on the Maharlika Investment Fund (MIF). I fully subscribe to the position paper of the Foundation for Economic Freedom, jointly issued by the Management Association of the Philippines and the UP School of Economics Alumni Association. However, as a former public servant at the Bangko Sentral ng Pilipinas (BSP), I wish to underscore a few basic points.
There is nothing in Senate Bill (SB) No. 1670 to promote economic growth and social development that is not presently undertaken by existing public institutions in collaboration with the private sector. In fact, President Bongbong Marcos himself declared when he approved the 2023 National Budget of ₱5.268 trillion that the budget “will provide the government with a tool to transform the economy, as well as in carrying the needed structural changes toward realizing the administration’s goals.” Aside from the annual national budget worth ₱5.268 trillion for 2023, Public-Private Partnership and Build-Operate-Transfer arrangements have long been used to promote economic growth and social development. Likewise, government financial institutions (GFIs) extend credit and invest in agriculture, infrastructure, and various industries.
Honorable Senators, the MIF is many things. One, it is untimely; two, its method of sourcing funds could destabilize public finance and ultimately raise our national debt; three, the BSP could be compromised as an autonomous and independent monetary authority; and four, it could further worsen governance and patronage. In other words, there is a great likelihood of market failure.
1. One, creating the MIF is untimely. Governments create wealth or investment funds to pursue special goals when they enjoy a balance of payments surpluses, official foreign currency operations, proceeds from privatizations and fiscal surpluses, and windfall receipts from commodity and metal sales. Putting up the MIF simply as an “additional investment platform” is a costly undertaking for the government.
The Philippines is no recipient of any of these surpluses. Instead, what we have are a serious balance of payments deficit, a large fiscal deficit reaching historical highs in excess of 6.0 percent of GDP—and as a result of huge borrowing due partly to the pandemic —a debt to GDP ratio exceeding 60 percent. We have nothing to invest at this point.
2. Two, the proposed alternative sources of funding are most destabilizing. SB No. 1670 proposes instead to source the funding from the GFIs such as the Development Bank of the Philippines (DBP), and the Land Bank of the Philippines (LBP), as well as from Government-owned and Controlled Corporations (GOCCs) other than the pension funds.
a. Diverting funds from GFIs and GOCCs to establish the MIF is self- defeating. The MIF is proposed to be funded by investment from GFIs and GOCCs; the same GFIs that needed public support during the pandemic. Diversion of funds from the GFIs to MIF for investment purposes would force the National Government to borrow funds to compensate for the loss of these earmarked funds to sustain governmental operations. This is also true when GOCC funds are used.
b. Using GFIs’ funds for MIF could affect their financial health and may result in potential bank runs and systemic risks. GFIs’ investible funds earmarked to MIF are deductible from their regulatory capital. Therefore, these GFIs could be constrained from both lending to key areas of the economy and investing in other infrastructure and social development projects. This could then lead to contagion and trigger a series of bank runs, especially now that the banking system’s balance sheets have arguably weakened due to the pandemic.
c. Mandating GFIs as contributors also distorts the regulatory environment. For instance, measures to safeguard deposits might need to be eased to facilitate their proposed contributions to the MIF. Doing such would introduce unfair competitive implications for the other banks. Likewise, this excessive regulatory forbearance may lead to an undercalculation of their overall risk profile and may adversely affect the safety and soundness of their operations. This spells bad news for millions of depositors who, when apprehensive, can cause bank runs and financial instability.
d. MIF can constrain GFIs’ flexibility in their investment and lending strategy. By mandating GFIs to invest in MIF, their flexibility to diversify their portfolio could be affected. Allowing future exposure to MIF in the form of debt securities could result in the overconcentration of loans and affect the loan portfolio of GFIs, because they will be guaranteed by the government. Banks adhere to best practices and good governance because it is the right thing to do, and the BSP requires compliance with them. The General Banking Law of 2000, for instance, limits government banks’ equity ceilings to ensure the diversification of their portfolio and mitigate their risk exposures. GFIs should be given the flexibility to determine their overall investment strategy consistent with their business model, target market, and strategy for keeping their competitiveness and profitability.
3. Three, another fundamental objection to the MIF is the inclusion of the BSP as among those that will contribute to the MIF. This could put the independence and credibility of the country’s sole monetary authority at risk, because it preempts the use of its declared income to the MIF rather than to build up its equity base as prescribed by its amended charter. This would be problematic, since the BSP’s ability to perform its mandate of safeguarding price and financial stability is also determined by the adequacy of its financial resources. With lower capitalization, the BSP’s conduct of monetary policy could be seriously impaired.Some argue that even with a mere ₱50-billion capitalization, the BSP has succeeded in maintaining price and financial stability by expanding its balance sheet. Given the on-going pandemic, the large fiscal deficit, and higher public debt, coupled with the sustained uncertainty in the global markets, it is important to ensure that the BSP’s balance sheet remains appropriately disciplined.
4. Four, without proper safeguards, the MIF could be a potential channel for corruption and bad governance. So-called Sovereign Wealth Funds (SWFs) succeed in an environment of good governance, rules-based public management, and the absence of special interest groups. Experiences from other countries show that without good governance, SWFs are prone to mismanagement. Papua New Guinea’s former Mineral Resource Stabilization Fund, Ecuador’s Stabilization Fund for Investment and Debt Reduction, and Nauru and Tonga funds started well but because of mismanagement and incompetent investment decisions were all abolished. Malaysia’s experience with 1MDB is another cautionary tale of how SWFs can be abused.
It bears noting that SB No. 1670 proposes to exempt the MIF from the GOCC Governance Act of 2011, the Government Procurement Reform Act, and the Salary Standardization Act, and payment of taxes and customs duties on any imports of supplies and equipment. These laws ensure adherence to good governance, and therefore exempting the MIF from such laws is like giving it a blanket authority to abuse. The BSP, for example, demands “a higher standards of knowledge and expertise in the field of finance, economics, risk and governance,” on top of bank regulation and supervision, and yet, no law has been passed by Congress to exempt it from most of these laws, in the spirit of good governance. Finally, instead of requiring this special body to remit its earnings directly to the government, the Senate bill mandates that 25 percent of all of its earnings should go to “families falling below the poverty threshold as determined by the Philippine Statistics Authority” in the form of poverty and subsistence subsidies. Is Congress abdicating its power over the budget?
This is hardly the best time to create the MIF. Earmarking resources for funding the budget deficit could drive the government to incur higher borrowing or impose higher taxes, or both. An investment fund is not worth undermining our existing institutions. We have managed to grow all these years without an investment fund, and we have also charted the next six years to achieve robust and resilient economic growth in the new development plan, all without this costly investment fund.
Thank you very much.
Sincerely yours,
Diwa C. Guinigundo
Former Deputy Governor for the Monetary and Economics sector, Bangko Sentral ng Pilipinas fellow, Foundation for Economic Freedom