All in the name of a sovereign investment fund?
OF SUBSTANCE AND SPIRIT
No less than a heads-up to the civil society is the Bangko Sentral ng Pilipinas’ (BSP) assessment that the Philippines’ growth targets for the next two to three years may not be attained. While the economy is projected to grow close to its potential capacity this year, pent-up demand is dissipating and previous monetary policy adjustments are now taking their toll on the economy, something that is expected in order to stabilize inflation. The BSP was forthright in disclosing that the strength of economic activities is likely to moderate.
Lower growth expectations would also imply that the fiscal targets may be difficult to hurdle, too. Driven by economic growth, revenues finance public spending. With a weaker economy, both revenues and spending would be below par. Either we legislate higher taxes, or we borrow more to sustain the level of spending on infrastructure and social services. We don’t expect anything of significance from public asset sale, and if ever we realize something, that would not be used to finance the budget. Based on the Maharlika Investment Fund (MIF) law, it would go directly to the MIF through the Department of Finance.
With fiscal deficit of ₱552 billion for the first six months of 2023, or 4.8 percent of GDP and public debt at ₱14.148 trillion or 61 percent of GDP as of June 2023, our fiscal situation today has been described as “still manageable.” As long as we grow, those ratios should improve over time.
But the recent finding of the Congressional Policy and Budget Research Department should keep our feet on the ground. While the 2024 ₱5.768 trillion budget represents a growth of 9.5 percent against this year’s budget, the programmed borrowing is to grow by 14.4 percent. Higher debt servicing means a diminution of the more productive part of the budget that supports government operations and economic projects and programs. Around ₱2.46 trillion is programmed to be borrowed to help finance the budget.
Beyond this, the problem today is that signs abound that growth is slowing down.
Herein lies the proper context of what former BSP Governor Philip Medalla recently declared at the UP School of Economics that the MIF would likely cause the Philippines to take on additional debt as there is no “wealth to manage.”
As always, Gov. Medalla’s remarks were a mouthful: “I really thought that there’s no wealth to manage. (According to the) rules of accounting, any money that goes (into the fund) is taken from somewhere else. Since somewhere else is financed by borrowing, then that’s clearly borrowing. Either that or someone else will suffer.”
Medalla’s remarks confirmed the idea that the MIF was established without any wealth to begin with. As we said before, and we say it again, we have no surplus fund, no windfall profit or huge proceeds from the sale of public assets. We have no sustainable and significant external payments surplus. In short, we have nothing to invest.
Where do we source the fund?
It was correct for Medalla to have reminded us that anything that is used to fund the MIF must have come from somewhere else. It’s not only an accounting rule, but it is also a basic rule of matter. Only God can produce something out of nothing. Congress is not God. Congress should know that we operate on one single fund concept. It is not exactly correct to say that MIF simply consolidates the country’s investible funds, or in the case of two big government banks, Land Bank and DBP, idle and loanable funds.
As the law provides, the MIF draws capital from the National Government (NG) as well as from both the Land Bank and the DBP. The ₱50 billion share of NG will be sourced from the annual dividends of the BSP for the next two years. Normally, these annual dividends are remitted to NG and form part of public revenues. In that sense, those dividends reduce the need for the NG to borrow. But since the country has been incurring deficit year after year, anything that goes into the fund implies additional borrowing.
As Medalla pointed out, “if those dividends go to Maharlika, then the government has to borrow more.”
If growth loses momentum in the next few years, and our need to borrow becomes unavoidable because of some unanticipated expense items like the MIF, it would be an impossible call to trim the fiscal deficit to GDP ratio from the current 4.8 percent to around 3.0 percent by 2028 and the debt to GDP ratio from the current 61 percent to less than 60 percent.
The former BSP governor also clarified that the two government banks’ ₱75 billion contribution to the seed fund could lower the demand for government securities. More important to us, diverting funds from these financial institutions could undermine their capacity to absorb potential loan losses resulting in weaker market confidence. Any market talk of financial weakness could send depositors into panic and trigger wholesale deposit withdrawal. This would have important consequences on the overall financial stability, investment and growth.
If we keep the budget level steady and we don’t adjust our borrowings and taxes for good optics, Medalla was correct in saying that someone else will suffer. Already, we hear not a few members of the Philippine Senate deploring the cutbacks in health and education, and possibly in infrastructure. We do not relish it, but this could mean we would be supporting less the State University and other state universities and colleges at the time we are lagging behind in the world standard in education. This would also mean less budget for the so-called specialty hospitals that were more than valuable to the masses during the pandemic. Finally, it could have escaped us, but economic growth would be far less sustainable, inclusive and self-sustaining if very little is done to mitigate the enormous deficit in roads, bridges, power, telecommunications and the digital platform.
All in the name of having a sovereign investment fund and repressed public spending to show fiscal sustainability?