Fundamental issues haunting Maharlika Investment Fund
Published Jan 5, 2023 12:06 am
OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
Putting up the Maharlika Investment Fund (MIF) cannot save us from the more urgent economic and social problems we face this year.
For instance, no government can prevent shear line-induced heavy rainfall that caused flash floods and landslides in Mindanao and parts of the Visayas exactly on Christmas Eve last year. The shear line, or the point where hot and cold air converge, produces rainfall in great quantity. Pagasa could only attempt to forecast its impact and its duration. To be sure, we have not seen the last and the worst of this shear line, or other similar destructive weather phenomena.
But the government should have no excuse for failing to prevent the consequences of flash floods and soil erosion by appropriate flood and water management, perhaps imposing no build zone including those for commercial purposes. The point is to build resiliency and increase the capacity for mitigating disaster risks. Nothing prevented many countries clustered in the Pacific Ring of Fire from developing such tenacity that allows them to handle calamities and sustain economic growth. More conscionable use of the budget, leveraging on public-private partnership, or both, are behind this ability to roll with weather punches.
In short, their governments must be doing the right things, and doing them right.
Establishing “an independent Maharlika Investment Fund” is hardly the way to “promote economic growth and social development” while we have neither surplus funds, nor windfall gains from privatization of public assets. We have neither oil like Norway’s, nor diamonds like Botswana’s. What we have are large fiscal deficit and increasing level of public debt.
Diverting funds from state-owned banks like Land Bank of the Philippines (LBP) and Development Bank of the Philippines (DBP) will not only reduce their investible funds and weaken their financial health, but it will also compromise the National Government’s (NG) revenue base. These government financial institutions (GFIs) are required to capitalize the Fund by a total of ₱75 billion, with an additional provision that “each founding GFI may increase its investment above their required equity contribution.” There is no guarantee that such equity investments could earn for these GFIs more than what they could earn investing the same amounts using their own treasuries and traders, or simply to lend them out to households and business activities. Adding a layer of fund management body is both unnecessary and expensive.
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. One of the lessons of the Global Financial Crisis of 2008-2009 should not be lost: price stability may not be enough to secure overall macroeconomic stability. A weak financial system could impede the flow of funds between savers and investors and pull back economic growth.
For the Maharlika fund cannot shake off this potential systemic risk. A bank-run outcome could only infuriate millions of small depositors who would be unable to withdraw their hard-earned savings and as in the case of other countries, set off chaos and street fighting.
Self-flagellation is the second fundamental flaw in the Maharlika concept. The Maharlika bill waives for NG some additional sources of revenues in favor of the investment fund. One such source is the dividend of both government-owned and controlled corporations and yes, GFIs such as Land Bank and DBP.
During the Duterte administration, some concessions to reduce dividend payments by these GFIs were granted. The reason was quite obvious. These GFIs needed some public support to “improve (the banks’) capital position so they can better fulfill their mandates.” Land Bank caters to agriculture while DBP is largely exposed to giving credit lines for infrastructure.
Their dividends augment the other revenues of government and somewhat curtail the need to borrow more in order to finance the budget deficit. These would be difficult because ₱75 billion from the GFIs would be assigned to the Maharlika fund. What would happen is maddening because on one hand, the NG would be proudly investing in various instruments and projects, and on the other hand, would be forced into borrowing to fund regular governmental operations.
Minus all the trappings, the Maharlika fund is therefore debt-financed.
This is more graphic because the bill would have NG giving up its more substantial source of revenue than these GFIs combined. The Maharlika bill mandates that for the first two years, all dividends of the BSP shall be remitted directly to the fund. Until such time that the BSP’s statutory capitalization of ₱200 billion is completed, 50 percent of its annual dividends shall accrue to the fund. Thereafter, all dividends of the BSP are dedicated to the Maharlika fund. To get a sense of the possible amount involved, the BSP for the last six years alone, from 2016-2021, remitted a total of ₱83.3 billion. If the bill gets the nod of Congress this year, the BSP’s estimated dividend for 2022 is about ₱30-35 billion. As much will be lost by NG in terms of foregone revenues which will have to be covered by additional borrowings.
It is difficult to understand why the BSP decided to support the Maharlika bill when its gross international reserves (GIR) were excluded from the list of possible sources of Maharlika funding. True, tapping the GIR for Maharlika could have compromised the independence and autonomy of the BSP in maintaining monetary and foreign exchange stability. But the bill’s earmarking of its dividend directly to the Maharlika fund could also have the same effect, that of weakening its ability to immediately build up its equity base,and promote price and financial stability.
BSP’s credibility is at risk because of fiscal dominance.
That is the third fundamental flaw of the Maharlika bill. Diverting the funds from the GFIs and the BSP could affect the stability of the banking system and business activities. It is most reckless for the bill that while risking the financial health of the GFIs, it is also eroding the ability of the BSP to help them in case they flounder. Section 11 of the bill specifically calls on the BSP to provide them “prudential and other regulatory reliefs” to allow them to contribute to the fund.
Several groups of economists and former public servants have raised the other fundamental issue of ensuring good governance in operationalizing the Maharlika concept. The bill exempts the fund from local and national taxes, declaration of dividends to NG and review of contracts by government counsel. Public access to the fund record is subject to its Board, leading to one observation that the fund becomes “most vulnerable to abetting recklessness, politicization, corruption, rent-seeking, and cronyism.”
Adhering to fundamentals in this case means dropping the Maharlika bill. Immaculate Conception works only for that baby in Bethlehem; the Maharlika fund is not a messiah.
Diwa C. Guinigundo
Putting up the Maharlika Investment Fund (MIF) cannot save us from the more urgent economic and social problems we face this year.
For instance, no government can prevent shear line-induced heavy rainfall that caused flash floods and landslides in Mindanao and parts of the Visayas exactly on Christmas Eve last year. The shear line, or the point where hot and cold air converge, produces rainfall in great quantity. Pagasa could only attempt to forecast its impact and its duration. To be sure, we have not seen the last and the worst of this shear line, or other similar destructive weather phenomena.
But the government should have no excuse for failing to prevent the consequences of flash floods and soil erosion by appropriate flood and water management, perhaps imposing no build zone including those for commercial purposes. The point is to build resiliency and increase the capacity for mitigating disaster risks. Nothing prevented many countries clustered in the Pacific Ring of Fire from developing such tenacity that allows them to handle calamities and sustain economic growth. More conscionable use of the budget, leveraging on public-private partnership, or both, are behind this ability to roll with weather punches.
In short, their governments must be doing the right things, and doing them right.
Establishing “an independent Maharlika Investment Fund” is hardly the way to “promote economic growth and social development” while we have neither surplus funds, nor windfall gains from privatization of public assets. We have neither oil like Norway’s, nor diamonds like Botswana’s. What we have are large fiscal deficit and increasing level of public debt.
Diverting funds from state-owned banks like Land Bank of the Philippines (LBP) and Development Bank of the Philippines (DBP) will not only reduce their investible funds and weaken their financial health, but it will also compromise the National Government’s (NG) revenue base. These government financial institutions (GFIs) are required to capitalize the Fund by a total of ₱75 billion, with an additional provision that “each founding GFI may increase its investment above their required equity contribution.” There is no guarantee that such equity investments could earn for these GFIs more than what they could earn investing the same amounts using their own treasuries and traders, or simply to lend them out to households and business activities. Adding a layer of fund management body is both unnecessary and expensive.
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. One of the lessons of the Global Financial Crisis of 2008-2009 should not be lost: price stability may not be enough to secure overall macroeconomic stability. A weak financial system could impede the flow of funds between savers and investors and pull back economic growth.
For the Maharlika fund cannot shake off this potential systemic risk. A bank-run outcome could only infuriate millions of small depositors who would be unable to withdraw their hard-earned savings and as in the case of other countries, set off chaos and street fighting.
Self-flagellation is the second fundamental flaw in the Maharlika concept. The Maharlika bill waives for NG some additional sources of revenues in favor of the investment fund. One such source is the dividend of both government-owned and controlled corporations and yes, GFIs such as Land Bank and DBP.
During the Duterte administration, some concessions to reduce dividend payments by these GFIs were granted. The reason was quite obvious. These GFIs needed some public support to “improve (the banks’) capital position so they can better fulfill their mandates.” Land Bank caters to agriculture while DBP is largely exposed to giving credit lines for infrastructure.
Their dividends augment the other revenues of government and somewhat curtail the need to borrow more in order to finance the budget deficit. These would be difficult because ₱75 billion from the GFIs would be assigned to the Maharlika fund. What would happen is maddening because on one hand, the NG would be proudly investing in various instruments and projects, and on the other hand, would be forced into borrowing to fund regular governmental operations.
Minus all the trappings, the Maharlika fund is therefore debt-financed.
This is more graphic because the bill would have NG giving up its more substantial source of revenue than these GFIs combined. The Maharlika bill mandates that for the first two years, all dividends of the BSP shall be remitted directly to the fund. Until such time that the BSP’s statutory capitalization of ₱200 billion is completed, 50 percent of its annual dividends shall accrue to the fund. Thereafter, all dividends of the BSP are dedicated to the Maharlika fund. To get a sense of the possible amount involved, the BSP for the last six years alone, from 2016-2021, remitted a total of ₱83.3 billion. If the bill gets the nod of Congress this year, the BSP’s estimated dividend for 2022 is about ₱30-35 billion. As much will be lost by NG in terms of foregone revenues which will have to be covered by additional borrowings.
It is difficult to understand why the BSP decided to support the Maharlika bill when its gross international reserves (GIR) were excluded from the list of possible sources of Maharlika funding. True, tapping the GIR for Maharlika could have compromised the independence and autonomy of the BSP in maintaining monetary and foreign exchange stability. But the bill’s earmarking of its dividend directly to the Maharlika fund could also have the same effect, that of weakening its ability to immediately build up its equity base,and promote price and financial stability.
BSP’s credibility is at risk because of fiscal dominance.
That is the third fundamental flaw of the Maharlika bill. Diverting the funds from the GFIs and the BSP could affect the stability of the banking system and business activities. It is most reckless for the bill that while risking the financial health of the GFIs, it is also eroding the ability of the BSP to help them in case they flounder. Section 11 of the bill specifically calls on the BSP to provide them “prudential and other regulatory reliefs” to allow them to contribute to the fund.
Several groups of economists and former public servants have raised the other fundamental issue of ensuring good governance in operationalizing the Maharlika concept. The bill exempts the fund from local and national taxes, declaration of dividends to NG and review of contracts by government counsel. Public access to the fund record is subject to its Board, leading to one observation that the fund becomes “most vulnerable to abetting recklessness, politicization, corruption, rent-seeking, and cronyism.”
Adhering to fundamentals in this case means dropping the Maharlika bill. Immaculate Conception works only for that baby in Bethlehem; the Maharlika fund is not a messiah.